What is double decreasing depreciation?

Double decreasing depreciation is a method used to calculate depreciation. It is generally used for assets where the new carries unusually high value. The double declining system simply means that the depreciation is calculated at a double relative rate during the product life life. This may be due to wear and tear, as an asset has become outdated or other factors. Most countries have accounting laws allowing businesses to artificially divide this value for several years. Depending on the system, the loss may contribute to lower tax obligations each year. Within this system, each asset is assigned a lifetime, often determined under the Tax Act, rather than completely left to the personal judgment of the accountant. The total depreciation is the difference between the original asset value and its expected value at the end of life known as the scrap value. Within the direct line, the annual value loss recorded for asset 100% of the total depreciation is divided by the number of years in its life.

For example, if the company buys a machine of $ 11,000 and assigns it a five -year lifetime with a scrap value of $ 1,000, annual depreciation will be recorded as 20% of a total depreciation of $ 10,000. This means that each year the company lists $ 2,000 as annual depreciation and reduces the value of the asset value on the accounts known as its accounting value, by $ 2,000. At the end of five years, the company will no longer record depreciation and the machine's account value will be $ 1,000 to achieve the scrap value. If the company later sells the machine as more than this scrap value, the excess will be considered a tax prone.

Double decreasing depreciation is designed to take into account a situation where the actual value of the asset decreases in the earliest years. There are two key differences. The first is that annual depreciation is based on the current accounting value of the asset rather than its original value. The second is that the annual depreciation rate takes 100% dividedThe number of years in lifetime and doubles the result.

As an example, the annual depreciation rate of 40% of the accounting value, not 20% of the original value, is an example. With the $ 11,000 from the previous example, the first year's depreciation is 40% of $ 11,000, and therefore $ 400, which leaves an accounting value of $ 600. In the second year, the depreciation is not 40% of $ 11,000, but rather 40% of $ 600, or $ 2,640 and the accounting value will drop to $ 4,000.

The biggest difference in practice with a double declining depreciation is that the accounting value of the act will not always reach the scrap value at the same time when the assigned life expires. Whether it reaches this sooner or later depends on the numbers involved. For this reason, the depreciation automatically ends at the end of the assigned life, or when the accounting value is the same or lower than the scrap value, depending on what happens first.