When you purchase an asset that you expect to use in your business for more than one year, financial accounting principles require you to depreciate, or expense, part of the cost over a number of years. However, if you want to take more depreciation in the earlier years, you have the option of posting your depreciation journal entries using the double-declining balance method, which is a variation of the straight-line method.

Straight-Line Depreciation

The straight-line depreciation method computes an asset's annual depreciation expense by subtracting the asset's salvage value, which is how much the asset will be worth after its useful life, from the purchase price and dividing the result over the asset's useful life. To illustrate, suppose your business purchases a piece of equipment for $10,000 that has a useful life of five years and no salvage value. Under the straight-line method, the annual depreciation expense is 20 percent of the asset's cost, or $2,000 ($10,000 cost / 5-year useful life). Each year, the journal entry is the same -- a debit to depreciation expense for $2,000 and a credit to accumulated depreciation for $2,000.

Double-Declining Balance Depreciation

Using the double-declining balance method allows you to take larger depreciation expenses in the earlier years of an asset's useful life. The “double-declining” refers to the fact that this depreciation method uses a rate that is twice as much as the rate used under the straight-line method, and that the expense amount will decrease each successive year. At some point towards the end of an asset's useful life, its net book value -- which is the asset's purchase price minus the balance in the accumulated depreciation account -- divided by its remaining useful life will yield a larger depreciation expense than the double-declining method. The first year that this occurs it becomes necessary to calculate depreciation this way. Essentially, this simply means that you use the straight-line method for the remainder of the asset's useful life.

Double-Declining Initial Entry

To illustrate how the journal entries are made under the double-declining balance method for the $10,000 piece of equipment, remember that the rate doubles from 20 to 40 percent. As a result, your journal entry in the first year consists of a debit to depreciation expense of $4,000 and a credit to accumulated depreciation for the same amount.

Remaining Journal Entries

After the first year, the equipment's net book value is $6,000. Continuing to use the 40-percent rate gives you $2,400 of depreciation in the second year, which is recorded as a debit to depreciation expense and a credit to accumulated depreciation.

By the fourth year, the net book value is down to $2,160 and depreciation expense is only $864. However, this is the first year that using the straight-line method will result in a larger depreciation expense, since dividing the $2,160 by the remaining two years of the asset's useful life yields $1,080 of depreciation in each year. As a result, switching to the straight-line method in the fourth year is necessary in order to fully depreciate the asset by the end of year 5. The journal entries for the fourth and fifth years are the same: debit of $1,080 to depreciation expense and a credit of $1,080 to accumulated depreciation.