The next method is double declining balance.
This method is a type of accelerated depreciation method.
This means that in the initial years, we will be depreciating the asset more and in the later years
the depreciation will be less.
We do this because practically, if you see any asset loses more value in the initial years, for example,
when we buy a car.
Just after buying the car, when you take that car out of the showroom, the value of that car decreases.
So if you bought a car for twenty thousand dollars just after a few days, it will be valued at probably
sixteen thousand or fifteen thousand dollars in the resale market.
After one or two years, it'll be probably 10, twelve thousand dollars, but after eight or nine years,
the decrease in value after each year will not be significant.
The value of the car will more depend on the condition of the car and not on the age of the car.
After that.
So to accommodate this practical scenario where the value of assets decreases more in the initial years
and less in the later years, we use accelerated depreciation methods.
Now, how do we calculate depreciation and double declining balance matter for this?
We use a rate of depreciation.
Rate of depreciation simply means the rate at which we will decrease the value of the asset.
And this rate is just the double of the straight line depreciation rate, for example, if the life
of an asset is favored by the straight-line method, we will be depreciating it by 20 percent each year.
However, in the declining balance, method will be depreciating it at twice that rate, that is, will
they appreciate that asset at 40 percent each year?
So this formula also calculate the same thing.
If the useful life of an asset is 10 years, you divide hundred by ten, you get 10 percent and you
multiply it by two because it is double declining balance to get 20 percent.
So far as it has 10 years of life, the rate of depreciation will be 20 percent.
Let's take an example.
Suppose you buy an asset of fifty thousand dollars with the useful life of five years.
Now know that when we are calculating the rate of depreciation and the declining balance budget, we
do not take the salvage value.
We adjust the depreciation value of lost one or two years to accommodate the salvage value.
So for most of the year, we just do double declining balance.
In the last one or two years, we will tweak the value so that we accommodate the salvage value.
So here we do not accommodate the salvage value when we are calculating the rate of depreciation.
So as it was bought for fifty thousand dollars, useful life is five years.
We calculate the rate by using this formula.
Hundred divided by five gets 20 percent, you multiply it by two, we get 40 percent.
So each year we have to reduce the value of assets by 40 percent.
So first year, 40 percent of.
Fifty thousand comes out to be 20000.
So the depreciation value is twenty thousand and the value of asset after first year is thirty thousand.
Now, in the next year, also, we will depreciated by 40 percent.
Which means that 40 percent of 30000 is 12000.
So the appreciation value will be 12000 and the value of asset after second year will be 18000.
So first year depreciation values 20000, second year depreciation values 12000 and so on.
So depreciation value will be more in the initial years and it will be less in the later period of time.