Hey there welcome back to Accounting Stuff!
I'm James and in this video I'll show you how to
calculate depreciation using the double declining balance method
Let's begin
Depreciation is the process of reducing
the book value of a tangible fixed asset due to use
wear and tear the passing of time
or obsolescence
Double declining balance depreciation
is an accelerated variable cost depreciation method
where the expense is higher in early years
Let's expand on this with an example
Pretend for a moment that
you're an architect you design beautiful
new houses for a living One day on the job your old laptop
finally kicks the bucket so you have to buy a new one
It costs you $2,500 This new laptop is what we
accountants call a tangible fixed asset it’s tangible because you can touch it
and it's fixed because you plan to use it for a long time
in this case probably five years Let's depreciate it using the
double declining balance method
Step 1
Write down what you know Your new asset
is a laptop and we're depreciating it using the double declining balance method
Your asset cost is what you initially paid for it… $2,500
With this method we can ignore residual value
useful life is five years
and we can leave depreciation rate blank for now
we'll return to that in Step 3 and we can ignore depreciable cost as well
Step 2 Build a depreciation schedule
When using the double declining balance method
the depreciation schedule is laid out in exactly the
same way as it was last week when we covered the
straight-line depreciation method
It's a table with five columns we have year
opening book value depreciation expense
accumulated depreciation and closing book value
Step 3 Calculate the depreciation expense
accumulated depreciation and book values for each period
This is where we get to fill in all of the blanks
and we'll start with year 1 this is the first accounting period
Your opening book value is the carrying amount of your laptop
at the start of the year this is the same as your asset cost
$2,500
Now let's work out your depreciation expense
This is the portion of your laptop that you write off as an expense
to your income statement during the year Remember that
double declining balance depreciation is an accelerated variable cost
depreciation method where the expense is higher in early years
This graph is quite different to the straight-line depreciation one
but the two are linked because in the
double declining balance method your depreciation expense is equal
to 2 multiplied by your straight-line depreciation rate
multiplied by your opening book value Your straight-line depreciation rate
is 1 divided by the useful life of your laptop so in this case that's 1 over 5 years which
is 20%
Your opening book value is the
carrying amount of your laptop at the start of each year
in year one it’s $2,500 the same as your asset cost
but be careful because this changes each period
2 multiplied by 20% is 40% your double declining balance depreciation rate
40% of $2,500 gives you $1,000 which is your laptop's depreciation expense
Accumulated depreciation is the sum of all depreciation expenses incurred to date
In year one it matches your depreciation expense so it's $1,000
Closing book value is the carrying amount of your laptop at the end of the year
This is the net asset amount that you hold in your balance sheet
it's your opening book value of $2,500 minus your depreciation expense of $1000
so $1,500
Your closing book value in year 1
becomes your opening book value in year 2 Your depreciation expense is your
double declining balance depreciation rate multiplied by your opening book value
at the start of the year So that's 40% multiplied by $1,500
which is $600
Accumulated depreciation is $1,600
and your closing book value is $1,500 - $600 which is $900
I outline this whole process for all of the depreciation methods
on my cheat sheet If you'd like to support this channel
then you can grab a copy on my website the link’s up here
and I'll drop one in the description as well Now this is what we're left with
if we repeat the technique for the rest of your laptop's useful life
You start off with a laptop costing $2,500 and you write off
a depreciation expense to your income statement each year
After five years you're left with a closing book value of $194
Note that the depreciation expense changes each time
Hmm… let's see this plotted on the graph this is your laptop’s book value over time
your asset cost at the beginning is $2,500 and it has a useful life of five years
the depreciation expense is variable because it changes each year
and it's accelerated because it's higher in early years
but the double declining balance method isn't the only accelerated depreciation method
In the next video I'll cover another one called sum of the year’s digits
Remember to click subscribe if you'd like to see that
I'll drop it in my depreciation playlist as soon as it's finished and if
you’d like copy of the cheat sheet
here it is
Stay safe