RUSANGU

UNIVERSITY
Department of Accounting

Title:

The Methods of Depreciation

An assignment presented in partial fulfilment of the Requirements of the course,

ACCT 110 ~ Non -Profit making Organizations

By:

ID#

Major:

Lecturer:

Dr. W.B. Musale

 INTRODUCTION:
“Depreciation is a method of reallocating the cost of a tangible asset over its useful life span of it
being in motion. Businesses depreciate long-term assets for both accounting and tax purposes.
The former affects the balance sheet of a business or entity, and the latter affects the net income
that they report. Generally, the cost is allocated, as depreciation expense, among the periods in
which the asset is expected to be used. Methods of computing depreciation, and the periods over
which assets are depreciated, may vary between asset types within the same business and may
vary for tax purposes. These may be specified by law or accounting standards, which may vary
by country. There are several standard methods of computing depreciation expense, including
fixed percentage, straight line, and declining balance methods. Depreciation expense generally
begins when the asset is placed in service. For example, a depreciation expense of 100 per year
for five years may be recognized for an asset costing 500. Depreciation has been defined as the
diminution in the utility or value of an asset. Depreciation is a non-cash expense. It does not
result in any cash outflow. Causes of depreciation are natural wear and tear.”- (Wikipedia, 2019)

“Depreciation is an attempt at cost allocation rather than asset valuation. Even in those situations
where an asset's fair market value has increased, depreciation recognition is still necessary.
Assets depreciate because of physical factors and economic factors. Physical factors consist of
the physical wear and tear and deterioration of the asset as the asset is used over time. Economic
factors consist primarily of market conditions that cause an asset to become obsolete. The asset
may be in perfect physical shape, but if other assets are produced in the marketplace that are
faster and more efficient, it becomes economically impractical to continue using this asset, and
early disposal becomes a necessity. Most plant assets do not depreciate completely-they can be
sold as scrap at the end of their useful lives. The ending value is referred to as scrap value,
salvage value, or residual value. Thus, the amount an asset will depreciate is its original cost less
its salvage value, and this is referred to as the depreciable base.”- (Englard, 2007, p.247)
 4 TYPES OF DEPRECIATION:

There are several types of depreciation methods but the most common ones are as follows:

 Straight-line Method
 Double declining balance Method
 Units of Production Method
 Sum of Years Digit Method

Straight- Double
line declining
Methods balance
Method

Types of
Depreciation

Units of Sum of
Production Years Digit
Method Method
In reference to the above conceptual framework, Depreciation Methods are explained as follows:

1. Straight-line Method of Depreciation:

“In straight line depreciation method, cost of a fixed asset is reduced uniformly over the useful
life of the asset. Since depreciation expense charged to income statement in each period is the
same, the carrying amount of the asset on balance sheet declines in a straight line.

Due to its simplicity, straight line method of depreciation is the most commonly used
depreciation method. Accounting principles require companies to depreciate its fixed assets
using method that best reflects the pattern in which the assets are being used. While the straight-
line method is appropriate in many situations, some fixed assets lose more value in initial years.
In such situations other depreciation methods are more appropriate.

Formula:

Depreciation expense under straight line method is calculated by dividing the depreciable
amount of the fixed asset by the useful life of the asset.

Depreciation Expense: Straight-line Method Depreciable Amount

= Useful Life

Depreciable amount equals cost minus salvage value. Cost is the amount at which the fixed asset
is capitalized. Salvage value (also called residual value or scrap value) is the estimated value of
the fixed asset at the end of its useful life.

Since an amount equal to the salvage value can be recovered by selling the asset, only the
difference between the cost and the salvage value is depreciated.

Useful life of a fixed asset represents the number of accounting periods within which the asset is
expected to generate economic benefits.

Normally purchase of fixed assets does not coincide with the start of financial year. In such
situations, some companies elect to charge the whole year depreciation to income statement in
the year of purchase (and do not charge any depreciation in the year of disposal). Another more
appropriate option is to charge proportionate depreciation for partial year.
Depreciation Expense: Straight-line Method for a Partial Year = DE N
× 12

Where
DE is the depreciation expense for a complete financial year.
N is the number of months during which the fixed asset was available for use.”-
(AccountingExplained, 2019)

2. Double Declining Balance Method of Depreciation:

“The double declining balance method of depreciation, also known as the 200% declining
balance method of depreciation, is a form of accelerated depreciation. This means that compared
to the straight-line method, the depreciation expense will be faster in the early years of the asset's
life but slower in the later years. However, the total amount of depreciation expense during the
life of the assets will be the same. The "double" means 200% of the straight line rate of
depreciation, while the "declining balance" refers to the asset's book value or carrying value at
the beginning of the accounting period. Since book value is an asset's cost minus its accumulated
depreciation, the asset's book value will be decreasing when the contra asset account
Accumulated Depreciation is credited with the depreciation expense of the accounting period.”-
(AccountingCoach,2019)

“Compared to other depreciation methods, double-declining-balance depreciation results in

larger expense in the earlier years as opposed to the later years of an asset’s useful life. The
method reflects the fact that assets are more productive in its early years than in its later years.
With the double-declining-balance method, the depreciation factor is 2x that of a straight line
expense method. Depreciation formula for the double declining balance method:

Periodic Depreciation Expense = Beginning book value x Rate of depreciation”- (CFI, 2019)

3. Units of Production Method:

“The unit of production method is a method of depreciation the value of an asset over time. It
becomes useful when an asset's value is more closely related to the number of units it produces
than the number of years it is in use. This method results in greater deductions being taken for
depreciation in years when the asset is heavily used.

Depreciation expense for a given year is calculated by dividing the original cost of the equipment
less its salvage value, by the expected number of units the asset should produce given its useful
life. Then, multiply that quotient by the number of units used during the current year.”- (Kenton,
2019)

“Units-of-production depreciation method depreciates assets based on the total number of hours
used or the total number of units to be produced over its useful life. The formula for the units-of-
production method:

Depreciation Expense = (Number of units produced / Life in number of units) x (Cost –

Salvage value)”- (CFI, 2019)

4. Sum of Years Digit Method:

“The sum of years’ digits method is a form of accelerated depreciation that is based on the
assumption that the productivity of the asset decreases with the passage of time. Under this
method, a fraction is computed by dividing the remaining useful life of the asset on a particular
date by the sum of the year’s digits. This fraction is applied to the depreciable cost of the asset to
compute the depreciation expense for the period.

Sum of years’ digits method attempts to charge a higher depreciation expense in early years of
the useful life of the asset because the asset is most productive in early years of its life. Also the
asset loses much of its productive efficiency in early years.”- (Accounting Formanagement.org,
2019)

“Sum-of-the-years-digits method is one of the accelerated depreciation methods. A higher

expense is incurred in the early years while lower expense is incurred in the latter years of the
asset. In sum-of-the-years digits’ depreciation method, the remaining life of an asset is divided
by the sum of the years and then multiplied by the depreciating base to determine the expense.
The depreciation formula for the sum-of-the-years-digits method:

Depreciation Expense = (Remaining life / Sum of the year’s digits) x (Cost – Salvage
value)”- (CFI, 2019)

CONCLUSION:
In conclusion, “The wearing down of plant assets is referred to as depreciation; the wearing
down (consumption) of natural resources (coal, oil, timber) is referred to as depletion.
Depreciation, as defined by the accounting profession, as the allocation of an asset's cost to
expense in a systematic and rational manner, over the periods expected to benefit from the use of
the asset. Under the matching principle, expenses should be matched to and recognized in the
same period as their related revenue. Therefore, plant assets-which produce revenue over several
periods-must have their expense (depreciation) gradually recognized and allocated over those
periods.”- (Englard, 2007, p.247)

REFERENCES:
 Wikipedia. (2019). Depreciation. Retrieved from
https://en.wikipedia.org/wiki/Depreciation
 Englard, B. (2007). Intermediate Accounting 1. McGraw Hill. New York, United Sates of
America.
 AccountingExplained. (2019). Straight-line Method of Depreciation. Retrieved from
https://accountingexplained.com/financial/non-current-assets/straight-line-depreciation
 AccountingCoach. (2019). What is the double declining balance method of depreciation?
Retrieved from
https://www.accountingcoach.com/blog/double-declining-balance-method-of-
depreciation
 CFI. (2019). Depreciation Methods. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-
depreciation-methods/
 Kenton, W. (2019). Unit of Production Method Definition. Retrieved from
https://www.investopedia.com/terms/u/unit-of-production-method.asp
 Accounting Formanagement.org. (2019). Sum of years’ digits method. Retrieved from
https://www.accountingformanagement.org/sum-of-the-years-digits-method/