Definition of double declining balance method of depreciation
The double declining balance method of depreciation also called accelerated depreciation method. In this depreciation method first fall the straight-line depreciation rate is determined, just dividing the original cost by its life. It means the scrap value is ignored while calculating the rate of depreciation.
The depreciation rate calculated above is multiplied by 2 to set the double declining balance rate. Then, the calculated depreciation rate is charged every year as in the declining balance method.
To calculate the rate of depreciation under this depreciation balance method the following formula can be used:
An equipment was purchased for Rs. 70,000. The life of the equipment was estimated 5 years. And, the estimated residual value of the equipment at the end of 5 years was Rs. 8,000.
a. Calculate depreciation rate for each year.
b. And, prepare depreciation schedule.
Original cost = Rs, 70,000
Residual value = Rs. 8,000
Estimated life of equipment = 5 years
Using the double declining balance method
Rate of depreciation = 100% / No. of years × 2
= 100% / 5 × 2 = 40%
Therefore, required depreciation rate = 40%
Under double declining balance method
On the above table, the residual value at the end of the first year is Rs. 8,000. The company can charge maximum depreciation amount to Rs. (Rs. 70,000 – Rs. 8,000) Rs. 62,000. Therefore, the last year annual depreciation is adjusted to maintain the maximum applicable depreciation.