Recording depreciation is an important part of accounting for long-term assets. Assets undergo wear and tear and their depreciating value must be tracked. There are three methods to choose from and among those choices are the Declining Balance Methods.
The main way this method differentiates from the others is that it charges more depreciation expense in the early years of an asset’s life than do other methods. The reasoning behind this accounting method is that a business uses up more of the asset in its earlier years. Assets tend to have less repair and maintenance in their earlier years. Most repairs tend to be made in the later years of the asset’s usage.
Two Types of Declining Balance Methods
- Double Declining Balance Method: An accelerated depreciation method is based on the declining book value of the asset. Net book value is the historical cost of the asset less its accumulated depreciation. The Double Declining Balance method initially ignores salvage value which is an estimate of the amount a business anticipates receiving at the end of the asset’s life.
There are two ways to calculate the annual depreciation rate-
- Calculate the straight-line expense and double it.
- Calculate the expense by dividing 2 by the Estimated Useful Life and then multiplying it by the book value.
- Sum-of-the-Years’-Digits Depreciation Method: This accelerated depreciation method uses the number of years of the asset’s expected life as a fraction. “The numerator is the number of years of estimated life remaining as of the beginning of the year, and the denominator is the sum of all digits and is the same for each annual computation” (Berry, Leonard Eugene. Financial Accounting Demystified. The McGraw-Hill Companies, Inc. 2011).