For GAAP Do You Have to Switch to Straight-Line Instead of Double-Declining?
Generally accepted accounting principles are standards that accountants use when preparing financial statements for private companies, publicly held corporations and governments. These standards determine which procedures are acceptable for use in accounting. The GAAP approves the use of both straight-line and double-declining methods for determining the depreciation of business assets.
GAAP Depreciation Guidelines
The GAAP approves four different methods for depreciating business assets: the straight-line method, the units of production method, the declining balance method and the sum-of-the-year's-digits method. Business accountants can choose any one of these methods, and the GAAP doesn't suggest that any method is superior to any other method. For this reason, it is unnecessary to switch from the double-declining balance method to the straight-line method to comply with GAAP standards.
To depreciate an asset using the straight-line method, an accountant divides the asset's depreciable value by the number of years the asset is likely to be useful to the company. The result is each year's depreciation expense. The accountant depreciates the asset by this depreciation expense each year until he has exhausted the full depreciable value. Using this method, the depreciation recorded for the asset will be the same every year.
To depreciate an asset using the double-declining method, the accountant multiplies the asset's depreciable basis by a percentage factor based on an acceleration rate of 200 percent. To determine the appropriate factor, the accountant divides 2 by the asset's estimated number of useful years. For example, if the asset will be useful for 10 years, then the depreciation factor is 20 percent. Under this method, the depreciation expense changes each year based on the amount of the asset's value that the accountant has already depreciated.
While the straight-line method depreciates equal amounts of an asset's value over several years, the double-declining method depreciates the majority of the asset's value during the first years of depreciation. However, the total amount depreciated over the asset's useful life is the same regardless of which method an accountant uses to depreciate the asset. The GAAP's other approved depreciation methods depreciate the same amount over the life of the asset as well.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.