Explain about Double-declining balance method in accounting.

Finance ManagementAccountingAcademic Content

As the name suggest double declining, the asset is depreciated twice the rate than straight line method. It is also called accelerated depreciation. It does not mean depreciation is higher, it depreciates higher amount in initial years of asset and gradually depreciation expenses decrease in later years of the asset as compared to straight line depreciation.

Formula

  • Double decline balance method = 2 * cost of the asset * depreciation rate
  • Double declining balance method = 2 * (cost of the asset/useful life)

Steps to calculate double declining method are as follows −

  • Cost of asset (initial cost).
  • Calculate salvage value.
  • Determine life of the asset.
  • Calculate depreciation rate (straight line).
  • Multiple calculated depreciation rate in above step by 2.
  • Calculate depreciate amount.
  • Readjust the amount by reducing the depreciation amount.
  • Repeat the above steps till it reaches its salvage value.

Advantages are as follows −

  • Reduces tax obligations.
  • Matched maintenance cost.
  • Minimum loss.
  • Good interest.

Disadvantages are mentioned below −

  • Low dividends.
  • More complicated than straight line depreciation.
  • Value of asset can never be zero.
  • Poor performance.

Journal entry

Depreciation expensesXXXXX
Accumulated depreciation
XXXXXX

Let after depreciation by double decline method …. Year 2 expense be YYYY

Then journal entry inn year 2 will be

Depreciation expensesYYYY
Accumulated depreciation
YYYY
raja
Published on 13-Aug-2020 11:04:40
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