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70 CHAPTER 3 Introduction to Accounting

asset purchase price ($5,000) less the residual value ($1,000), which is $4,000.
This amount is to be depreciated over four years, resulting in an annual depre-
ciation expense of $1,000. This process is outlined in Figure 3-20. The last col-
umn in the fi gure is the book value following the depreciation.

Figure 3-20: Straight-line depreciation

Figure 3-21 illustrates the double-declining balance method for the same
asset. The depreciation rate is equal to double the depreciation rate for the
straight-line method. The annual depreciation in the straight-line method
is $1,000. Therefore the depreciation rate is $1,000 divided by $5,000, which
is 20%. In the double-declining balance method this rate is doubled to 40%. By
comparing Figure 3-21 with Figure 3-20, you can see that the double-declining
balance method is an accelerated depreciation method that allows the com-
pany to expense the asset at a faster rate than the straight-line method. Note
that the book value cannot be less than the residual value. Consequently, the
depreciation in the fourth year is a fi xed amount ($80) needed to bring
the book value to the residual value of $1,000.

1,080–80

Figure 3-21: Double-declining balance depreciation

A company selects a depreciation method based on a variety of factors
including generally accepted accounting principles, tax laws, and regulatory
requirements, to name a few. Consequently, an asset can be valued differ-
ently for different purposes. For example, the same asset can be depreciated
using one method to satisfy legal and regulatory requirements but a differ-
ent method to address management’s needs. Referring back to the computer
purchase, for internal purposes the computer can be depreciated over two
years using the double-declining balance method. However, tax laws may
require that it be depreciated over fi ve years using the straight line method.
Thus, an asset can be depreciated using different methods and assumptions

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