The fastest depreciation method is the “Double Declining Balance” (DDB) method. It is an accelerated depreciation method that allows for higher depreciation expenses in the early years of an asset’s life, gradually decreasing over time.
In the Double Declining Balance method, the depreciation expense is calculated as a fixed percentage (usually 2 times or 200%) of the asset’s net book value (NBV) at the beginning of each accounting period. The NBV is the original cost of the asset minus its accumulated depreciation.
Here’s how the Double Declining Balance (DDB) method works:
- Determine the Initial Cost: Identify the original cost of the asset, including all costs necessary to bring the asset to its working condition, such as purchase price, transportation, and installation costs.
- Estimate the Useful Life: Determine the estimated useful life of the asset. The useful life is the number of years or units of production expected from the asset before it becomes obsolete or is no longer economically viable.
- Decide on the Depreciation Rate: For the DDB method, the depreciation rate is calculated as 2 times (or 200%) the straight-line depreciation rate, which is 100% divided by the useful life in years.
Depreciation Rate (DDB) = 2 × (100% / Useful Life in Years)
- Calculate Depreciation Expense: To calculate the depreciation expense for each accounting period, multiply the depreciation rate by the net book value (NBV) of the asset at the beginning of the period.
DDB Depreciation Expense = Depreciation Rate × Net Book Value at the Beginning of the Period
- Adjust Net Book Value: Subtract the depreciation expense from the net book value to get the new net book value at the end of the period.
Net Book Value at the End of the Period = Net Book Value at the Beginning of the Period – DDB Depreciation Expense
- Repeat the Process: Continue this process each accounting period until the net book value of the asset becomes negligible or reaches its estimated residual value (salvage value).
The Double Declining Balance method results in higher depreciation expenses in the early years of an asset’s life, which gradually decrease over time. This method is useful when assets tend to be more productive and valuable in their initial years, and it allows for faster expense recognition in the financial statements. However, it may not be suitable for assets that have relatively constant or steady performance throughout their useful lives.