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Simple English definitions for legal terms
double-declining depreciation method
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A quick definition of double-declining depreciation method:
The double-declining depreciation method is a way to estimate how much an asset will wear out or become obsolete over its useful life. This method is used to calculate the amount of tax deduction for depreciation. It spreads the cost of the asset over time by deducting twice the percentage recognized by the straight-line method and applying that double percentage to the remaining balance each year. This method results in larger deductions in the earlier years of an asset's life and smaller deductions in the later years.
A more thorough explanation:
The double-declining depreciation method is a formula used to estimate the wear, use, or obsolescence of an asset over its useful life. This method is useful in calculating the allowable annual tax deduction for depreciation.
For example, let's say a company purchases a machine for $10,000 with a useful life of 5 years and no salvage value. Using the double-declining depreciation method, the company would deduct 40% of the machine's value in the first year (2 times the straight-line rate of 20%), which is $4,000. In the second year, the company would deduct 40% of the remaining value, which is $2,400. The process continues until the end of the asset's useful life.
This method allows for larger deductions in the earlier years of an asset's life and smaller deductions in the later years, reflecting the asset's decreasing value over time.