DEPRECIATION
be calculated as follows:
• is the reduction in the value of an asset
over time due to wear and tear,
obsolescence, or other factors. It is an
accounting concept that recognizes the
decrease in value of an asset over its useful
life.
• is considered a non-cash charge because it
doesn't represent an actual cash outflow.
The entire cash outlay might be paid
initially when an asset is purchased, but
the expense is recorded incrementally for
financial reporting purposes. That's
because assets provide a benefit to the
company over a period of time. But the
depreciation charges still reduce a
company's earnings, which is helpful for
tax purposes
TYPES OF DEPRICIATION
1. Straight-Line
Using the straight-line method is the most basic
way to record depreciation. It reports an equal
depreciation expense each year throughout the
entire useful life of the asset until the entire asset
is depreciated to its salvage value.
HOW TO CALCULATE DEPRECIATION
USING STRAIGHT-LINE METHOD
• Depreciation Expense = (Cost of Asset -
Salvage Value) / Useful Life of Asset
Where:
• Cost of Asset: The total cost of the asset,
including all expenses incurred to acquire
and prepare the asset for its intended use.
• Salvage Value: The estimated value of the
asset at the end of its useful life.
• Useful Life of Asset: The estimated period
during which the asset will be used to
generate revenue or provide services.
Examples:
• Let's say a company purchases a machine
for $50,000 that has a useful life of 10
years and a salvage value of $5,000. Using
the straight-line method, the annual
depreciation expense for the machine can
• Depreciation Expense = (Cost of Asset -
Salvage Value) / Useful Life of Asset
Depreciation Expense = ($50,000 - $5,000) / 10
Depreciation Expense = $4,500 per year
• So, the annual depreciation expense for the
machine is $4,500 per year.
2. The Sum-of-the-Years' Digits (SYD) method
is a form of accelerated depreciation that allows
businesses to expense more of the asset's value in
the early years of its life, as compared to straight-
line depreciation. It is called "Sum-of-the-Years'
Digits" because it involves summing the digits of
the asset's life years. The formula for the SYD
method of depreciation is as follows:
 Depreciation Expense = (Remaining
Useful Life / Sum of the Years' Digits) x
Cost of Asset
 To calculate the sum of the years' digits,
you need to add up the numbers from 1 to
the number of years of the asset's useful
life. For example, if an asset has a useful
life of 5 years, the sum of the years' digits
would be:
 1 + 2 + 3 + 4 + 5 = 15
 To calculate the depreciation expense for
each year, you need to multiply the asset's
cost by a fraction. The numerator of the
fraction is the remaining useful life of the
asset, while the denominator is the sum of
the years' digits.
 Let's say a company purchases an
equipment for $10,000 with a useful life of
5 years. The sum of the years' digits for
this asset is 15 (1+2+3+4+5). The
depreciation expense for each year would
be
 Year 1: (5/15) x $10,000 = $3,333.33
 Year 2: (4/15) x $10,000 = $2,666.67
 Year 3: (3/15) x $10,000 = $2,000.00
 Year 4: (2/15) x $10,000 = $1,333.33
 Year 5: (1/15) x $10,000 = $666.67
3.Double-declining balance (DDB) method
• is a type of accelerated depreciation
method that allows a company to write off
the value of an asset more quickly than the
straight-line method. This method is often
used for assets that depreciate more rapidly
in the early years of their useful life.
• The formula for the double-declining
balance method is:
• Depreciation expense = (2 / Useful life) x
Book value at the beginning of the year
• Where:
• Useful life is the estimated number of
years that the asset will be used before it is
retired or disposed of.
• Book value is the cost of the asset minus
the accumulated depreciation.
• To illustrate how this method works,
let's say a company buys a machine for
$100,000 with an estimated useful life of
five years and no salvage value. Using the
double-declining balance method, the
depreciation expense for the first year
would be:
• Depreciation expense = (2 / 5) x $100,000
= $40,000
• The book value of the machine at the end
of the first year would be:
• Book value = $100,000 - $40,000 =
$60,000
• For the second year, the depreciation
expense would be:
• Depreciation expense = (2 / 5) x $60,000 =
$24,000
• The book value of the machine at the end
of the second year would be:
• Book value = $60,000 - $24,000 = $36,000
 And so on, until the end of the asset's
useful life.
Straight-line Method
Advantages:
• It is simple and easy to understand.
• It provides a steady and predictable rate of
depreciation.
• It is widely accepted by accounting
standards.
Disadvantages:
• It does not reflect the actual usage of the
asset.
• It does not account for the differences in
the asset's efficiency over time.
• It results in a higher book value for older
assets.
Declining Balance Method
Advantages:
• It provides a higher depreciation expense
in the earlier years of an asset's life.
• It reflects the actual usage of the asset.
Disadvantages:
• It can be complex to calculate.
• It can result in a very low book value for
older assets.
• It may not be accepted by some accounting
standards.
Sum of the Years' Digits Method
Advantages:
• It provides a higher depreciation expense
in the earlier years of an asset's life.
• It reflects the actual usage of the asset.
• It is a more accurate method of
depreciation than the straight-line method.
Disadvantages:
• It can be complex to calculate.
• It can result in a very low book value for
older assets.