Depreciation Methods

Factors in Computing Depreciation

Cost

Usually it is estimated, and expressed in years, units, miles, or output.

Useful Life

residual value (salvage value ) is estimated , and expected cash value at end of useful life

Residual Value

Depreciation Methods

Depreciation Expense = (Cost – residual value) / useful life

Straight-line

Depreciation per unit =

(Cost – Residual value) /Life in units

life

Units-of production

Depreciation expense =

Depreciation per unit x activity during the period

life

Declining- balance

(Cost – Accumulated depreciation)* 2/ life

life

Sum of year digit

To calculate depreciation charges using the sum of the year’s digits method, take the expected life of an asset (in years) count back to one and add the figures together. Example:

10 years useful life = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 Sum of the years = 55

In the first year, the asset would be depreciated 10/55 in value

Second year would be depreciated 9/55

Third year would be depreciated 8/55, etc.

example

a $5,000 computer with a $200 salvage value and 3 years useful life would be calculated as follows:

3 years useful life = 3 + 2 + 1 Sum of the years = 6

In the first year, the computer would be depreciated by 3/6ths *(cost – S.V) which is 3/6*(4,800)= $2,400

The second year, by 2/6 * 4,800 = $1,599.84

and the third and final year by the remaining 1/6 *4800 = $800.16 the third year.

NOTES:

Book value = Cost – Accumulated depreciation

Accumulated depreciation increases over time.

Book value decreases over time