{"id":37372,"date":"2022-05-10T15:32:00","date_gmt":"2022-05-10T15:32:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=37372"},"modified":"2022-06-07T15:33:52","modified_gmt":"2022-06-07T15:33:52","slug":"depreciation-methods","status":"publish","type":"post","link":"https:\/\/businessyield.com\/finance-accounting\/depreciation-methods\/","title":{"rendered":"DEPRECIATION METHODS: Common Depreciation Methods & Formula","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n
Depreciation is one of the methods in accounting that explores an asset’s original cost or value, what it might be worth at the end of its life cycle, and how the value of the asset changes over time. This invariably means, the decrease in an asset’s value over time as a result of usage, wear and tear, or datedness. Rather than devaluing an item by writing it off as a deduction, depreciation acknowledges the item’s worth over time and how it changes with use. Companies consider various methods and factors in order to calculate depreciation. And when calculating, they employ different methods. Hence, this post will outline the various methods for calculating depreciation and how to determine the value of an asset. It also elaborates on other depreciation methods such as accelerated depreciation methods, GAAP methods, and MACRS methods.<\/p>\n\n\n\n
What Is Depreciation?<\/span><\/h2>\n\n\n\n
Depreciation is the measurement of an asset’s value deterioration over time, use, or obsolescence. In essence, it is the decrease in the value of fixed assets as a result of their use, the changes that come with time, or aging.<\/p>\n\n\n\n
In the United States, accountants must calculate and report depreciation on financial statements using generally accepted accounting principles (GAAP). GAAP is a set of financial reporting accounting rules and standards that accountants widely accept. Accounting experts can employ various different allowed methods of depreciation according to GAAP requirements.<\/p>\n\n\n\n
In addition, depreciation is one expense that does not require any cash outflow. As a result, depreciation as an expense is distinct from all other types of expenses.<\/p>\n\n\n\n
Regardless, a corporation takes into account several criteria when calculating depreciation. The method of depreciation is one such factor. As a result, oragnizations employ multiple depreciation methodologies to calculate depreciation. <\/p>\n\n\n\n
Let’s see the several depreciation methods<\/p>\n\n\n\n
Depreciation Methods in Accounting<\/span><\/h2>\n\n\n\n
There are four basic methods to calculate depreciation in accounting, which include straight-line, double-declining balance, units of production, and the sum of years’ digits. Let’s discuss them in detail.<\/p>\n\n\n\n
The straight-line method is commonly used to calculate a period’s average fall in value. This is the most frequent and easy approach for calculating depreciation. The straight-line approach is used to depreciate assets like vehicles, office furniture, computers, and office buildings. You’ll need to know the asset’s depreciable base (its original cost) and salvage value (its value at the end of its useful life) to calculate the straight-line method.<\/p>\n\n\n\n
The following is the formula for annual depreciation using the straight-line method:<\/p>\n\n\n\n
Depreciation Cost = (Initial Cost of an asset \u2013 Salvage Value)\/Useful life of an asset<\/p><\/blockquote>\n\n\n\n
Where Initial cost = Original cost of purchase<\/p>\n\n\n\n
Salvage value= The value of the asset at the end of its useful life<\/p>\n\n\n\n
Useful Life= represents the expected number of years a company can use an asset.<\/p>\n\n\n\n
Let’s consider the following example<\/p>\n\n\n\n
Say XYZ transport company purchases a new transport vehicle for $50,000. The salvage value of that vehicle is $10,000 and its useful life is 9 years. What will the depreciation cost be?<\/p>\n\n\n\n
Depreciation Cost = (Initial Cost of an asset \u2013 Salvage Value)\/Useful life of an asset<\/p>\n\n\n\n
$50,000 – $10,000 \/ 9 years<\/p>\n\n\n\n
$40, 000 \/ 9yrs<\/p>\n\n\n\n
XYZ’s annual depreciation costs will be $4,444 over the lifecycle of the asset<\/p>\n\n\n\n