Depreciation accounts for decreases in the value of a company’s assets over time. In the United States, accountants must adhere to generally accepted accounting principles (GAAP) in calculating and reporting 澳洲幸运5开奖号码历史查询:depreciation on financial statements.

GAAP is a set of rules that includes the details, complexities, and legalities of business and corporate accounting. GAAP guidelines highlight several separate, allowable methods of depreciation that♌ accounting professionals may use.

Methods of Depreciation

Companies have several options for depreciating the value of assets over time under GAAP. The four depreciation methods include straight-line, declining balance, sum-of-the-years' digits, and units of production. Most companies use a single depreciation methodology for all of their assets. Thus, the 澳洲幸运5开奖号码历史查询:methꦉod𓄧s used in calculating depreciation are typically industry-specific.

Straight-Line Depreciation

The 澳洲幸运5开奖号码历史查询:straight-line method is the most common and simplest to use. A company estimates an asset's useful life and salvage value (scrap 𒅌value) at the end of its life. Depreciation determined by this method must be expensed in each year of the asset's estimated lifespan.

Declining Balance Depreciation

The declining balance method is a type of 澳洲幸运5开奖号码历史查询:accelerated depreciation used to write off depreciation costs earlier in an asset's life and to minimiz𒈔e tax exposure. With this method, fixed assets depreciate earlier in life rather than evenly over their entire estimated useful🧸 life.

This method is often used if an asset is expected to lose greater value or have greater utility in earlier years. It also helps to create a larger realized gain when the asset is sold. Some companies may use the 澳洲幸运5开奖号码历史查询:double-declining balance equation for more aggressive depreciation and earlyꦉ expense༺ management.

Sum-of-the-Years' Digits Depreciation

The sum-of-the-years'-digits method (SYD) accelerates depreciation as well, but less aggressively than the declining balance method. Annual depreciation is derived using the total number of year♚s of the asset's use♚ful life.

The SYD depreciation equation is more appr🤪opriate than the straight-line calculation if an asset loses value more quick꧟ly or has a greater production capacity during its earlier years.

Units of Production Depreciation

The units of production method assigns an equal expense rate to each unit produced. It's most useful where an asset's value lies 🎶in the number of units it produces or in how much it's used rather than in its lifespan. The formula determines the expense for the accounting period multiplied by the number of units produced.

Examples

Let's say ABC company purchases machinery for $25,000. This asset's salvage value is $500, and its useful life is 10 years. The examples below demonstrate how the formula for each depreciation method would work and how the company would benefit.

Calculating Depreciation Using the Straight-Line𝓀 Method

Formula: (cost of a🐎sset - salvage value)/useful life

Method in action: ($25,000 - $500)/10 = $2,450

Result: ABC's yearly tax deduction is $2,450 over the life of the asset.

Calcula🦄ting Depreciation Using the Declining Balance Method

澳洲幸运5开奖号码历史查询: Formula: current book𝐆 value x depreciation rate

澳洲幸运5开奖号码历史查询: Method in action: $25,000 x 30% = $7,500

Result: ABC's depreciation amount in the first year is $7,500. In the second year, the current book value would be $17,500 ($25,000 - $7,500). So, the depreciation amount would be $5,250 ($17,500 x 30%). And so on.

Calculating Depreciation Using the Sum-of-the-Years' Digits Method

Formula: (remaining lifespan/SYD) x (asset cost - salvage value🅘) where SYD equals the total of all the years in the lifespan

Method in action: SYD = 55 (1+2+3+4+5+6+7+8+9+10); (10/55) x ($25,000 - $500) = $4,454

Result: In the first year, ABC can deduct $4,454 in depreciation expenses. In the second year, the deduction would be $4,009 [(9/55) x $24,500]. And so on.

Calculating Depreciation Using the Units of Productio🉐n M𒐪ethod

Formula: (asset cost - salvage value)/estimated units over asset's life x actual units made

Method in action: ($25,000 - $500)/50,000 x 5,000 = $2,450

Result: ABC's depreciation expense is $2,450 for the year. This method will produce results that vary annually depending on the number of units made.

The Bottom Line

There are four allowable methods for calculating depreciation, and which one a company chooses to use depends on that company's specific circumstances.

Small businesses looking for the easies♓t approach might choose straight-l🐼ine depreciation, which simply calculates the projected average yearly depreciation of an asset over its lifespan.

Since different assets depreciate in different ways, there are other ways to calculate it. Declining balance depreciation allows companies to take larger deductions during the earlier years of an asset's lifespan.

Sum-of-the-years' digits depreciation does the same thing but less aggressively. Finally, units of production depreciation takes an entirely different approach by using units produced by an asset to determine the asset's value.