The double declining balance method is also an accelerated depreciation method. Similar to the sum of years method. We have a purchase cost of $10,000, and we want to look at the depreciation in the first couple of years, it's accelerated over a straight line depreciation method. In the double declining balance method, no salvage value is specified, at least in the traditional double declining balance method. When we use Excel's double declining balance function, it does allow you to specify a salvage value, but I wanted to explain the traditional method, and then I'll show you how this can be adapted in Excel. We have a useful life, here we have five years. The first step of the double declining balance, we take for the first year, we calculate the straight line depreciation rate, assuming salvage value is zero. At the beginning of the first year, we have a value of $10,000. We divide that by 5, again, straight line depreciation, assuming salvage value is zero, so that's $2,000 per year. The second step is to double this rate, and that's why this is called the double declining balance method. In general, this is known as the declining balance method. You can use different factors instead of double. So you could use 1.5, you can use 1.75, you can use other factors. But in the double declining balance, it's a 2x factor, so we double this to $4,000 per year. Then this is the depreciation for that first year. That means the value of that asset at the end of the first year is $6,000. As you'll see, depreciation is simply 40 percent of each year's initial value. Let's take a look at the second year. The value at the start of the second year is $6,000, we act as if we are going to depreciate $6,000 to zero over five years. We do our $6,000 divided by 5 years, we get $1,200 per year, and then we double that rate, 2,400, this is the depreciation for the second year. So we can subtract that 2,400 from the 6,000 that we started with, the value at the end of the second year is $3,600. We can keep going. In the third year, we can calculate depreciation, would be 720, we multiply that to 1,440, that's the depreciation of that third year, and the value at the third year therefore is 2,160, and we can keep going. Again, the salvage value is not specified in the traditional method, but Excel's DDB, double declining balance function, allows the user to specify as salvage value. If the value would fall below the specified salvage value, the output of the DDB function is just going to be the salvage value. I'll show you this here momentarily in Excel. Here we are in Excel. Let's go ahead, and I'm going to put in the upper part of the double declining balance worksheet. I'm just going to do this by the formula that I was showing on the slide a few moments ago, and then we will implement the DDB function. So the depreciation, we're always going to take the previous year's value, and we're going to divide by the useful life of n, that's our useful life. We're going to take the previous value and we divide by n, but then we multiply by 2. So we're depreciating by 4,000. The value at the end of that first year is just going to be the previous year's value minus the depreciation, and that's $6,000. Because I wrote this formula in terms of a relative reference, is using the value of the previous year, I can just take this and I can copy it down, and then we can also copy this down. This is an easy way to just quickly create the depreciation based upon a double declining balance method. Let's go ahead and do this using the DDB function that's built into Excel. So I'm going to put in cost salvage value. Those are both defined earlier up at the top here. Then what I'm going to do, it asks for the life, so the life is n years, that's five. We have period, the period is just going to be the year. I'm going to specify one over here. This is where I talked earlier, the double declining balance, by default, the factor is two. But you could put in 1.5, you can put in 2.5, you can experiment around, and now it either make this go faster or slower. So there's different options for declining balance method. I'm just going to leave that off, which means it's a double declining balance. You note that when I talked about the traditional double declining balance method, there is no salvage value, but the DDB function allows you to specify the salvage value. So let's go ahead and press "Enter." I'm going to do the same thing that I did before. I'm going to subtract the depreciation for that year from our previous year's value, and now I'm going to drag this down, and I'm going to drag down the value. Here you see that at least for the first three years, we have the same depreciation as what we got using the formula above. However, you notice that with the DDB function, if the value is going to drop below the specified salvage value, then Excel DDB function is just going to output the salvage value. So the orange line here at years 4 and 5 just corresponds to the salvage value. Finally, let's talk about the unit of production method. In this method, depreciation is proportional to units produced. It's essentially based on the straight line method, but it normalizes it to the units or whatever you're producing. So whatever that piece of equipment is producing or yielding, it might be a car and the units are miles, so you're basically getting miles out of it. It could be a camera, a nice SLR camera with shutter clicks. Maybe you're a professional photographer and you have 200,000 shutter clicks, and that's the useful life. So it's best when production levels change each year. Instead of useful life, we use useful units. Useful units is an estimate of the total units that will be produced with or buy the asset over its lifetime. So maybe you purchase a piece of equipment that's capable of creating a 1,000 widgets. That's the useful units as 1,000 widgets. The depreciation per year is the number of units produced that year divided by the useful units. Then we multiply that fraction by the difference between cost minus the salvage value. The yearly depreciation will depend entirely on the units produced per year. Let's go through an example here. Units of production method. Let's just say that the useful life of a particular asset or piece of equipment is 5,000 units. In the first example here, I originally forgot to include the units produced, so I just put those in there. Let's calculate the depreciation. Unfortunately, there is no function in Excel to do this, but it's quite easy. Let me actually go up here and I'm going to name this units. That's our useful units. Our depreciation is going to be our units produced divided by the useful life. If I stop there, this will be a fraction of 24 percent. But what we're going to do is multiply that by the difference between cost and salvage value. So we're basically normalizing the difference between cost and salvage value by the fraction, the percentage of overall units that are produced each year. So the depreciation based upon 1,200 units produced is 1,920. I can drag this down like I did before, I can subtract from the previous year's value, the depreciation for that year, and then I can drag this formula down. You see that for this particular scenario, example A, the depreciation would look something like this. So there's different depreciation each year that the business or company can claim. I'm just going to simply copy these formulas because I have a different scenario, example B down here, Control, Copy, Control, V. For this example, we're using a lot fewer units in the earlier years, but then we ramp up production. So based upon the unit of production method of depreciation in the first couple years, you're not getting much depreciation at all that can be claimed. But then as you're producing more units, you can start to claim more depreciation. Hopefully, you learned a little bit more about the more common depreciation methods in this screencast. Thanks for watching.
