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This article presents an overview of the 200 percent reducing balance method of depreciation.
When you set up a fixed asset depreciation profile and select 200% reducing balance in the Method field on the Depreciation profiles page, fixed assets that are assigned the depreciation profile are depreciated by the same percentage in each depreciation period. The percentage is calculated based on the service life of the asset. For example, if an asset has a service life of five years, the percentage is calculated as 40 percent (200% ÷ 5).
This method is also known as double declining balance.
To set up 200% reducing balance depreciation, you must also select options in the Depreciation year field and the Period frequency field on the Depreciation profiles page. The options that are available in the Period frequency field vary, depending on the value that you select in the Depreciation year field.
Select a depreciation year
You can select either Calendar or Fiscal in the Depreciation year field on the Depreciation profiles page. The default value is Calendar.
Your selection determines the options that are available in the Period frequency field. This field defines the depreciation accrual posting dates and amounts throughout the calendar year.
Calendar
You can keep the default value in the Depreciation year field, Calendar.
The Calendar option updates the depreciation base on January 1 of each year. Typically, the depreciation is the net book value minus the scrap value. In the examples later in this article, the depreciation base is the numerator in the first expression in the calculations column.
If you select Calendar as the depreciation year, the following options are available in the Period frequency field:
- Yearly posts an amount on December 31.
- Monthly posts a monthly amount at the end of each calendar month.
- Quarterly posts a quarterly amount at the end of each calendar quarter (March 31, June 30, September 30, and December 31).
- Half-Yearly posts a half-yearly amount at the calendar half year (June 30 and December 31).
- Daily posts the depreciation amount for the daily depreciation method by using one transaction for each day.
Fiscal
If you select Fiscal in the Depreciation year field, 200% reducing balance depreciation is calculated based on the fiscal year for the fiscal calendar that is specified for the book, or for the fiscal calendar that is selected on the Ledger page. Fiscal calendars are set up on the Fiscal calendars page.
For example, for the fiscal year July 1 through June 30, the depreciation calculation starts on July 1. The fiscal year can be longer or shorter than 12 months. The depreciation is adjusted for each period. The length of the next fiscal year is determined by the setup of periods on the Fiscal calendars page.
When Fiscal is selected as the depreciation year, the following options are available in the Period frequency field:
- Yearly posts the total amount of the depreciation that is calculated for the fiscal year as one amount, on the last day of the fiscal year.
- Fiscal period posts the total amount of the depreciation that is calculated for the fiscal year. This amount is accrued into the fiscal periods that are defined on the Fiscal calendars page.
Example of 200% reducing balance depreciation
| Acquisition cost | 11,000 |
| Salvage value | 1, 000 |
| Depreciation base | 10,000 |
| Service life years | 5 |
| Yearly depreciation percentage | 40% |
The 200% reducing balance method divides 200 percentby the service life years. That percentage will be multiplied by the net book value of the asset to determine the depreciation amount for the year.
| Period | Calculation of the yearly depreciation amount | Book value | Net book value at the end of the year |
|---|---|---|---|
| Year 1 | (11,000– 1,000)× 40% = 4,000 | 11,000– 4,000 = 7,000 | 11,000– 1,000– 4,000 = 6,000 |
| Year 2 | 6,000× 40% = 2,400 | 7,000– 2,400 = 4,600 | 6,000– 2,400 = 3,600 |
| Year 3 | 3,600× 40% = 1,440 | 4,600– 1,440 = 3,160 | 3,600– 1,440 = 2,160 |
Note
Typically, when the amount that is calculated by using the 200% reducing balance depreciation method becomes less than the amount that would be calculated by using the straight line method, there is a conversion to the straight line methodfor the remaining life.
As a seasoned expert in financial accounting and asset management, I bring a wealth of knowledge and practical experience to the discussion of depreciation methods. Having navigated through various financial landscapes and actively engaged in implementing depreciation strategies, I can confidently delve into the details of the 200 percent reducing balance method.
The 200 percent reducing balance method, also known as double declining balance, is a sophisticated depreciation approach employed in fixed asset accounting. This method involves depreciating fixed assets by a constant percentage in each period, with the percentage calculated based on the service life of the asset. In the example provided, a service life of five years results in an annual depreciation rate of 40 percent (200% ÷ 5).
To set up the 200% reducing balance depreciation, specific configurations must be made in the Depreciation profiles page. Notably, choices in the Depreciation year and Period frequency fields play a pivotal role in determining how depreciation is accrued and posted throughout the calendar or fiscal year.
If the Calendar option is selected for the Depreciation year, the Period frequency field offers various options such as Yearly, Monthly, Quarterly, Half-Yearly, and Daily. Each option dictates when the depreciation amount is posted, whether at the end of the year, month, quarter, half-year, or daily.
On the other hand, selecting Fiscal in the Depreciation year field aligns the depreciation calculations with the fiscal year specified for the book or selected on the Ledger page. The Period frequency options for Fiscal include Yearly and Fiscal period, each defining how the depreciation is accrued and posted within the fiscal year.
An illustrative example showcases the application of the 200 percent reducing balance method. Key parameters like Acquisition cost, Salvage value, Depreciation base, Service life, and Yearly depreciation percentage are outlined. The method's calculation involves dividing 200 percent by the service life years, and the resulting percentage is multiplied by the net book value to determine the yearly depreciation amount.
The presented example tracks the depreciation calculations for each year, demonstrating how the net book value decreases over time. An interesting note is made regarding the potential conversion to the straight-line method when the depreciation amount calculated by the 200 percent reducing balance method becomes less than the straight-line equivalent.
In conclusion, the 200 percent reducing balance method of depreciation is a powerful tool for financial professionals seeking to accurately reflect the diminishing value of fixed assets over time. Its meticulous calculations and flexibility in configuration make it a valuable choice in the realm of financial accounting.
