The double declining method of calculating depreciation is a kind of depreciation method in which the large amount of depreciation is calculated during the beginning years of the useful life of a certain fixed asset. The double declining balance method of depreciation is used in the following circumstances when the asset is utilized more rapidly during the early years of its useful life. The other reason to use double declining balance depreciation method is the situation where a firm requires recognizing all its future expense at present.
The method of double declining balance of depreciation is more complex to calculate as compared to the straight line method of depreciation. In addition to that most of the assets are utilized at a consistent rate so it is difficult to calculate depreciation rapidly using double declining balance depreciation. Moreover this method skew the possibility of profitability earned by an asset based business as a result it is very difficult to ascertain the true profitability of the business in the near future.
In order to calculate depreciation by this method the book value of the asset in the beginning of the useful first year of life is multiplied by the multiple of the straight line rate of depreciation. The formula of double declining method of depreciation can be shown as under:-
Double Declining Balance Depreciation = 2 x Straight Line Depreciation Rate x Book value at the beginning of the year
There are several variation of this method that is 150 percent declining balance method where 1.5 figure is used in the above mentioned formula instead of the figure 2.
Sidra Farid