Depreciation Methods
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. Different methods are used depending on the asset type and accounting requirements.
Select Depreciation Method
The straight-line method is the simplest and most commonly used. It allocates equal depreciation expense each year over the asset's useful life.
The declining balance method applies a constant depreciation rate each year to the declining book value, resulting in higher depreciation in early years.
The sum-of-years' digits method applies a decreasing fraction each year based on the remaining useful life, resulting in accelerated depreciation.
Depreciation Schedule
Total Depreciable Amount: $
Total Depreciation Over Years: $
Year | Beginning Value | Depreciation | Accumulated Depreciation | Ending Value |
---|
Practical Examples
Example 1: Straight-Line Method
Asset Cost: $10,000 | Salvage Value: $1,000 | Useful Life: 5 years
Annual Depreciation = ($10,000 - $1,000) / 5 = $1,800 per year
Example 2: Double Declining Balance
Asset Cost: $10,000 | Salvage Value: $1,000 | Useful Life: 5 years | Rate: 40% (200%/5)
Year 1: $10,000 × 40% = $4,000 | Year 2: ($10,000 - $4,000) × 40% = $2,400
Example 3: Sum-of-Years' Digits
Asset Cost: $10,000 | Salvage Value: $1,000 | Useful Life: 5 years
Sum of digits = 1+2+3+4+5 = 15 | Year 1: ($10,000 - $1,000) × (5/15) = $3,000
Year 2: ($9,000) × (4/15) = $2,400 | Year 3: ($9,000) × (3/15) = $1,800
Depreciation Method Comparison
Method | Advantages | Disadvantages | Best For |
---|---|---|---|
Straight-Line | Simple to calculate, equal expenses | Doesn't match actual asset use pattern | Assets with consistent utility |
Declining Balance | Matches higher early-year expenses | More complex, may not fully depreciate | Assets losing value quickly |
Sum-of-Years' Digits | Accelerated but smoother than DDB | More complex calculation | Assets with high early productivity |