OK. Can someone explain why double declining depreciation doesn’t zero an asset out all the time? I’m not an accountant, but I’ve been tasked with doing a simple depreciation schedule. This should be easy enough with Excel, and in fact it is. However, the formulas don’t seem to account for all of the depreciated value unless your salvage value is high enough.
I thought perhaps I was doing something wrong in Excel, so I went to some online calcs to check (like this one and found the same thing. Based on entering my real and some hypothetical numbers, if your salvage value is less than 10% (actually a little over) of the staring value, you won’t zero the asset out.
Does this mean I shouldn’t use that method in that case? How’s this usually handled?
In double declining depreciation, the amount to be depreciated is recalculated each year. So, if it has a useful life of 10 years, and starts at 50K, then instead of depriciating 5K in the first year, it depreciates 10K, or 10%. The next year, however, it only depreciates 10% of the new value, which is 40K, so 4K, and so on. This can never bring it to zero, of course.
The way that this is handled is to switch to straight line depreciation after some length of time - unless, of course, the salvage value is high enough to make this unnecessary.
Another point of note is that when you calculate the amount to depreciate for double declining, you ignore salvage value - whereas in straight line you might do (100K-10K)10%, the dd calc would just be 100K10%*2
Long story short, switch to straight line after a few years