In Dexxter, you can use straight-line depreciation, which is the most common method, but in many cases you can also use declining-balance depreciation. This means you’ll perform more depreciation in the early years of the depreciation period compared to later years.
Why use declining balance depreciation? 📉
By depreciating your investment using the declining balance method, the amounts of your depreciation will be significantly higher in the early years than with straight-line depreciation. This means the investment has a quicker impact on your costs.
The total value of the depreciation remains the same, of course, so in the long term the impact of the investment is the same.
Conditions 📋
You cannot simply depreciate all your investments on a declining balance basis. For example, this is not permitted for:
- intangible fixed assets (except for investments in audiovisual works). Examples include purchases of software licences,
- fixed assets where you transfer the right of use to a third party. Think of a machine that you rent out,
- motor vehicles (except for taxis and vehicles hired with a driver).
In addition, you must record your decision to depreciate the fixed assets on a declining balance basis by adding a form (Form 328 K)(Here is an URL to the Dutch-language document) to your personal income tax return.
How does declining balance depreciation work? 🖊️
You cannot simply select how much you wish to depreciate in which year when using the declining balance method. There are specific rules governing this.
You calculate the declining depreciation by applying a fixed percentage, which may not exceed twice the straight-line depreciation rate. It is important to note that the amount of this depreciation may not exceed 40% of the acquisition value. This will be a particular point of attention in the first year of depreciation.
In the next years, you apply that percentage to the residual value. In other words, to the purchase price minus the depreciated portion.
❗As soon as this fixed percentage applied to the residual value results in a lower amount than what you would depreciate on a straight-line basis, you may switch to the straight-line method.
Practical example of declining balance depreciation
You purchase a computer with a business depreciation value of €3,000. You would normally perform straight-line depreciation over 3 years, meaning you would perform depreciation of 33.33%, or €1,000, each year. Declining balance depreciation works as follows:
Depreciation in year 1:
You may depreciate at double the percentage in the first year of declining balance depreciation, though capped at 40%. 3,000 x 66.66% ➡️ 3,000 x 40% = 1,200
Depreciation in year 2:
You apply the percentage to the remaining amount: 1,800 x 66.66% = 1,200
Depreciation in year 3:
You again apply the percentage to the remaining amount: 600 x 66.66% = 400
❗This amount is lower than the amount you would normally perform straight-line depreciation on (1,000), so from this point onwards you may switch to straight-line depreciation and perform depreciation of 1,000 euros in the current year. As this is more than the residual value in this case, you simply perform depreciation on the remaining value (600 euros).
Declining balance depreciation in Dexxter 🖥️
As there are some restrictions on declining balance depreciation and you could therefore make mistakes, you must first activate it under Settings > General > Accounting.
Once you’ve activated it, this option will appear when you enter your investment. Accounting with Dexxter is that easy!
Useful uRLs 🔗
Depreciating an investment: how do you do it?
How to calculate the depreciation of an investment: a numerical example
