Legal Definitions - double-declining depreciation method

The double-declining depreciation method is an accounting technique used by businesses to allocate the cost of a tangible asset over its useful life. It is an "accelerated" depreciation method, meaning it recognizes a larger portion of an asset's depreciation expense in its earlier years and a smaller portion in its later years. This approach is often chosen for assets that lose value more quickly at the beginning of their life, are more productive when new, or face rapid obsolescence. The "double-declining" aspect refers to the fact that the depreciation rate used is twice the straight-line depreciation rate, applied to the asset's declining book value each year.

• Example 1: Manufacturing Equipment

  Imagine a furniture manufacturer invests in a new, high-speed automated woodworking machine. This machine is incredibly efficient and productive in its first few years, allowing the company to produce more items faster. However, it is also subject to significant wear and tear from constant operation and might become less competitive as newer, even more advanced models enter the market.

  Illustration: By using the double-declining depreciation method, the manufacturer can record a greater expense for the machine's loss of value in its initial years of operation. This reflects the machine's higher productivity and greater decline in market value when it's new, allowing the company to match higher expenses with the higher revenue generated during those peak performance years.

• Example 2: High-Tech Servers

  Consider a software development company that purchases a large array of powerful new servers to host its applications and data. While these servers are cutting-edge today, server technology evolves rapidly. Within a few years, these servers will likely be significantly less efficient or even considered obsolete compared to newer models available on the market.

  Illustration: The double-declining method is particularly suitable here because it accounts for the rapid obsolescence and decline in utility of high-tech assets. The company can deduct a larger portion of the servers' cost as depreciation early on, reflecting their quick loss of competitive edge and value in a fast-paced technological environment.

• Example 3: Commercial Delivery Vehicles

  A package delivery service acquires a new fleet of delivery vans. These vans are immediately put into heavy, daily service, covering many miles and making frequent stops. They experience significant initial wear and tear and often require more maintenance as they age, leading to a quicker decline in their resale value during their early years.

  Illustration: Applying the double-declining depreciation method allows the delivery service to recognize a higher depreciation expense for these vans in their first few years. This aligns with the reality that commercial vehicles often experience their most significant decline in value and incur the most intensive use and potential damage when new, reflecting their immediate and heavy contribution to the business.