Basic Accounting - Depreciation

There are four methods of calculating depreciation:

1. Straight line depreciation
2. Double declining balance
3. Units of production
4. Sum of years

Depreciation allows us to allocate the cost of intangible assets over time.

The most common method of depreciation is straight line depreciation:

Straight Line Depreciation: $ Depreciation Expense = \frac {Original Asset Value-Salvage Value} {Useful Life} $

For Instance: Consider a piece of equipment that costs 25,000 dollars with an estimated useful life of 8 years and no salvage value. The depreciation expense per year for this equipment would be as follows:

Straight Line
Time Period	1	2	3	4	5	6	7	8
Asset Value	$ 25,000	$ 21,875	$ 18,750	$ 15,625	$ 12,500	$ 9,375	$ 6,250	$ 3,125
Depreciation Expense	$   3,125	$   3,125	$   3,125	$   3,125	$   3,125	$ 3,125	$ 3,125	$ 3,125

There are also ways to visualize this graphically:

If you want costs to decrease over time (accelerating depreciation), you can use the double declining balance method:

Double Declining Balance Depreciation: $ (\frac {2} {Useful Life Of An Asset})(Asset Value) $

If the salvage value is higher than the ending value, report the salvage value before useful life and don’t record the next period’s depreciation expense. If the salvage value is lower than the ending value, report the salvage value and report a larger depreciation expense.

For Instance: Consider a piece of property, plant, and equipment (PP&E) that costs 25,000 dollars, with an estimated useful life of 8 years and a 2,500 dollar salvage value. To calculate the double-declining balance depreciation, set up a schedule:

Double Declining Balance
Time Period	1	2	3	4	5	6	7	8
Asset Value	$ 25,000	$ 18,750	$ 14,063	$ 10,547	$   7,910	$ 5,933	$ 4,449	$ 2,500
Depreciation Expense	$   6,250	$   4,688	$   3,516	$   2,637	$   1,978	$ 1,483	$ 1,112	$ 1,949

There are also ways to visualize this graphically:

For output-based methods one can use the units of production method.

Units of Production Depreciation: $ Depreciation Expense= (\frac {Quantity Produced} {Life in Quantities})(Asset Value-Salvage Value) $

For instance: assume that the asset costs 25,000 dollars, the salvage value is 2,500 dollars and the useful life is 8 years.

Units of Production
Time Period	1	2	3	4	5	6	7	8
Asset Value	$ 25,000	$ 22,707	$ 19,611	$ 17,232	$ 14,739	$ 11,385	$ 8,376	$ 2,500
Quantity	80	108	83	87	117	105	116	89
Depreciation Expense	$   2,293	$   3,096	$   2,379	$   2,494	$   3,354	$   3,010	$ 3,325	$ 5,876

This can be shown graphically:

The sum of year digits is one of the accelerated depreciation methods.

Sum of Years Digit Depreciation: $ Depreciation Expense=( \frac {Remaining Life} {Sum of the Years})(Asset Value-Salvage Value) $

For Instance, consider a piece of equipment that costs 25,000 dollars and has an estimated useful life of 8 years and a 2,500 dollar salvage value. To calculate the sum-of-the-years-digits depreciation, set up a schedule:

Sum of Years Digits
Time Period	1	2	3	4	5	6	7	8
Asset Value	$ 25,000	$ 20,625	$ 16,458	$ 12,986	$ 10,208	$   8,125	$ 6,736	$ 2,500
Fraction	19%	17%	14%	11%	8%	6%	3%	0%
Depreciation Expense	$   4,375	$   4,167	$   3,472	$   2,778	$   2,083	$   1,389	$    694	$ 4,236

This can be graphed: