[Anonymous]

I understand the methods pretty well, but the one simple thing that is screwing me is for which methods do I recalculate the asset balance prior to the application of the depreciation method?

For example, a $10,000 asset straight line, no salvage for 5 years. So, that is 1/5 (or 20%) on 10,000 for each of the 5 years. So, $2000 depreciation each of the 5 years. But with DDB balance, not only are you doubled the 20% but, you are also reducing the depreciation expense from the prior year before applying the current years 40%. Why are we doing it for DDB and not straight line? Why would it not be 40% on the 10,000 for each of the 5 years? Why would we do it for one, and not the other?

So, of all the methods, which do we updated the asset’s value (asset-depreciation) each period prior to that current year’s depreciation method, and which do we not?

[Missy]

Its pretty easy. If you did 40% of the 10k for five years, you would have depreciated 20k total ($4,000 x 5)

Think of what the TOTAL depreciation expense over the 5 years would be, can't be more than the asset.

You wouldn't adjust the depreciation amount using straight line because then you wouldn't have depreciated the full asset value.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[JohnWayneIsGod]

If we depreciated 40% of $10,000 each year, we’d depreciate $4,000 each year. Over five years, that is $20,000 of depreciation for a $10,000 asset. Doesn’t work.

To explain, with straight line it is the same depreciation amount each year. With double-declining, we are taking more depreciation during the earlier years of the asset while taking less depreciation as each year goes by. Since more of the asset is expensed each year, we have to depreciate from the book-value of the asset rather than the historical value.

For example: I have a $1 million asset with an economic life of five years and no salvage value. Under the straight-line method, I simply divide $1 million by 5 and expense it by $200,000 each year until I’m done. Simple and everyone loves it.

With double-declining, we have decided that we want to expense more of it upfront because it is something like a computer that depreciates more quickly at beginning of its life. So calculations will go like this:

(1/5)*2 = .40

Every year we will depreciate the asset by 40% of its current book-value.

Year 1: 1000000*.4 = 400,000 expenses (New BV of $600k)

Year 2: 600000*.4 = 240k expenses (New BV of $360k)

And on it goes. One caveat is that on the final year we have to make an entry to expense the rest of the item. Mathematically, dividing a whole number by a fraction will never result in zero. So in the example I listed above, in the fifth year we’d need to ‘force’ it to be zero without using the double-declining method formula as doing so would only leave us with a positive number and overstate the final book-value of our asset.

Another trick for you to try to set up t-accounts, to include both the asset and the contra accounts, and work with both methods. This way you can see how it works. If you tried using the historical value to depreciate the asset each year with the double-declining balance method, you’d see that it wouldn’t work.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Anonymous]

Thanks! 🙂 so what about the other methods where it isn't so obvious? like, sum of the years digits and units of production? Do we deduct the depreciation expense out of the asset prior to calculating the next period's expense? Is straight line the only method where you don't re-value the asset for each period's depreciation expense?

[JohnWayneIsGod]

Here are the other formulas. With all of the other methods you use cost to determine depreciation expense. Double-declining balance is pretty unique.

Units of Production Method

(Cost – Salvage Value) * (Units Used / Total Estimated Units) = Depreciation Expense

Sum of Years Digits

Cost * Years Left / ((N(N+1))/2).

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Anonymous]

When you say cost, you mean historical cost? So, DDB is then the only method where you deduct the prior period's depreciation from the asset before applying the current periods formula?

[JohnWayneIsGod]

@allaboutstout. Yes, historical cost. DDB is the only one where you are going to use the book value to calculate the annual depreciation.

BTW: If you ever want to play around in Excel to check your work, the formulas are =DDB =SYD and =SLN for double-declining, sum-of-years digits, and straight line respectively. Sometimes I like to build a depreciation schedule with Excel formulas and then do it again manually as practice. Is great when you run out of problems to practice and it makes for really effective practice.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Anonymous]

Nice tip, John Wayne. Didn't know excel did that.

[Author]

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