Declining Balance Depreciation Methods

• The most common way to calculate depreciation is with the declining balance method. Hemera Technologies/AbleStock.com/Getty Images

  Depreciation is the gradual loss of an asset's value over its useful life span. There are various methods accountants use to calculate depreciation, and they select these methods according to the monetary benefits and the characteristics of the asset. One of the most common methods accountants use to calculate depreciation is the declining balance method, and there are two ways of using it.

150 Percent Declining Balance Method

• The 150 percent declining balance method is an accelerated depreciation method, meaning that it depreciates a larger portion of the value of the asset during the first years of the asset's life. This method is used with all types of farm property and non-farm properties with three, five, seven, 10, 15 and 20 years of useful life, according to the U.S. Internal Revenue Service Publication 946. If you are using this method to depreciate your assets, in the last years of the asset's life, your depreciation amount will be lower than in the first years.

  To calculate depreciation with this method, you need to know the asset's purchase price, its useful life, the accumulated depreciation (the sum of the depreciation you have calculated for previous years) and the depreciation rate. For the first year, the accumulated depreciation is 0. The depreciation rate is the division of 1.5 by the asset's years of useful life. You multiply the depreciation rate by the difference between the asset's cost and its accumulated depreciation (called book value). The result of this calculation is your depreciation for that respective year.

  When you get to the point in which your depreciation with the 150 percent method is lower than or equal to the depreciation you would get with the straight line method (a method in which you deduct the same amount of depreciation for every year), the IRS allows you to start using the straight line method instead of the 150 percent method.

  For example, if your asset's cost is $140,000 and its useful life is a period of 5 years, with the 150 percent method, your depreciation rate is 0.3 (1.5 divided by 5), making its depreciation for the first year $42,000 ($140,000 x 0.3).

200 Percent Declining Balance Method

• The 200 percent declining balance method also depreciates a larger portion of the asset's cost in the first years of life. You can use this method for non-farm properties with three, five, seven and 10 years of life, according to the IRS Publication 946. You can also change to the straight line method once it gives you an amount of depreciation equal to or higher than what the 200 percent declining balance gives you. For example, if your asset has a useful life of six years and your depreciation with the 200 percent method is $400 for the fifth year, and if the straight line method gives you a depreciation of $500 for that year, you can use this method instead of the 200 percent method.

  As another example, if your asset's cost is $140,000 and its useful life is a period of 5 years, with the 200 percent method, the depreciation rate is 0.4 (2 divided by 5), making its depreciation for the first year $56,000 ($140,000 x 0.4).

Differences

• The main difference between the 150 percent and 200 percent methods is that the 200 percent depreciation gives you an even higher depreciation for every year than the 150 percent method. This is because the depreciation rate (two divided by the asset's years of life) is higher with this method. Multiply your depreciation rate by the asset's book value (its cost minus its accumulated depreciation). As with the 150 percent method, the accumulated depreciation for the first year is also 0. The result you obtain for each year you calculate depreciation is that year's depreciation.