What is Matching Principle of Accounting? Declining balance method is considered an accelerated depreciation method because it depreciates assets at higher rates in the beginning years and lower rates in the later years. It might be easier to understand with an example. Therefore, the book value of $51,200 multiplied by 20% will result in $10,240 of depreciation expense for Year 4. Suppose a business has bought a machine for $ 100,000. When the $80,000 is multiplied by 20% the result is $16,000 of depreciation for Year 2. The depreciation expense is then recorded in the accumulated depreciation account, which reduces the asset book value. Depreciation account of the balance sheet will look like below over the 8 years of the machine’s life: How to adjust the depreciation charges on the Balance sheet, Income statement, and the cash flow statement? Assume a company purchases a piece of equipment for $20,000 and this piece of equipment has a useful life of 10 years and a salvage value of $1,000. In this sense, the declining balance method frontloads the depreciation expense on the first half of the asset’s life opposed to the straight line method that evenly distributes depreciation expense over the asset’s life. In this sense, the declining balance method frontloads the depreciation expense on the first half of the asset’s life opposed to the straight line method that evenly distributes depreciation expense over the asset’s life. What Does Double Declining Balance Method Mean. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy. What is the Double Declining Balance Method? It also matches revenues to expenses in that assets usually perform more poorly over time, so more expenses are recognized when the performance and income is higher. At the beginning of the second year, the fixture's book value will be $80,000, which is the cost of $100,000 minus the accumulated depreciation of $20,000. A double-declining balance method is a form of an accelerated depreciation method in which the asset value is depreciated at twice the rate it is done in the straight-line method. A double-declining balance method skews profitability. The asset will depreciate by the same amount; however, it will be expensed higher in the early years of its useful life while the depreciation expense will be lower in the later years as compared to the straight-line method of depreciation. To learn more, see the Related Topics listed below: Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Now, $ 25,000 will be charged to the income statement as a depreciation expense in the first year, $ 18,750 in the second year, and so on for 8 continuous years. Using the Double-declining balance method, the depreciation will be: The following are the steps involved in the calculation of depreciation expense using a Double declining method.