Scribd Logo
Upload

Welcome to Scribd!

  • 13 views

    DEPRECIATION

    Uploaded by

    maryellll457
    The document discusses different methods for calculating depreciation expense over the useful life of an asset, including straight-line, sum-of-years digits, and double-declining balance. Straight-line depreciation allocates equal expense each year while other methods allocate higher expenses in earlier years. The document provides examples to demonstrate calculating depreciation expense under each method.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    DEPRECIATION

    Uploaded by

    maryellll457
    13 views2 pages
    The document discusses different methods for calculating depreciation expense over the useful life of an asset, including straight-line, sum-of-years digits, and double-declining balance. Straight-line depreciation allocates equal expense each year while other methods allocate higher expenses in earlier years. The document provides examples to demonstrate calculating depreciation expense under each method.

    Original Description:

    Accounting

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses different methods for calculating depreciation expense over the useful life of an asset, including straight-line, sum-of-years digits, and double-declining balance. Straight-line depreciation allocates equal expense each year while other methods allocate higher expenses in earlier years. The document provides examples to demonstrate calculating depreciation expense under each method.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    13 views2 pages

    DEPRECIATION

    Uploaded by

    maryellll457
    The document discusses different methods for calculating depreciation expense over the useful life of an asset, including straight-line, sum-of-years digits, and double-declining balance. Straight-line depreciation allocates equal expense each year while other methods allocate higher expenses in earlier years. The document provides examples to demonstrate calculating depreciation expense under each method.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 2

    DEPRECIATION depreciation expense for the machine can

    be calculated as follows:
    • is the reduction in the value of an asset
    over time due to wear and tear, • Depreciation Expense = (Cost of Asset -
    obsolescence, or other factors. It is an Salvage Value) / Useful Life of Asset
    accounting concept that recognizes the
    Depreciation Expense = ($50,000 - $5,000) / 10
    decrease in value of an asset over its useful
    Depreciation Expense = $4,500 per year
    life.
    • So, the annual depreciation expense for the
    • is considered a non-cash charge because it
    machine is $4,500 per year.
    doesn't represent an actual cash outflow.
    The entire cash outlay might be paid 2. The Sum-of-the-Years' Digits (SYD) method
    initially when an asset is purchased, but
    the expense is recorded incrementally for is a form of accelerated depreciation that allows
    financial reporting purposes. That's businesses to expense more of the asset's value in
    because assets provide a benefit to the the early years of its life, as compared to straight-
    company over a period of time. But the line depreciation. It is called "Sum-of-the-Years'
    depreciation charges still reduce a Digits" because it involves summing the digits of
    company's earnings, which is helpful for the asset's life years. The formula for the SYD
    tax purposes method of depreciation is as follows:

    TYPES OF DEPRICIATION  Depreciation Expense = (Remaining


    Useful Life / Sum of the Years' Digits) x
    1. Straight-Line Cost of Asset
    Using the straight-line method is the most basic  To calculate the sum of the years' digits,
    way to record depreciation. It reports an equal you need to add up the numbers from 1 to
    depreciation expense each year throughout the the number of years of the asset's useful
    entire useful life of the asset until the entire asset life. For example, if an asset has a useful
    is depreciated to its salvage value. life of 5 years, the sum of the years' digits
    HOW TO CALCULATE DEPRECIATION would be:
    USING STRAIGHT-LINE METHOD  1 + 2 + 3 + 4 + 5 = 15
    • Depreciation Expense = (Cost of Asset -  To calculate the depreciation expense for
    Salvage Value) / Useful Life of Asset each year, you need to multiply the asset's
    Where: cost by a fraction. The numerator of the
    fraction is the remaining useful life of the
    • Cost of Asset: The total cost of the asset, asset, while the denominator is the sum of
    including all expenses incurred to acquire the years' digits.
    and prepare the asset for its intended use.
     Let's say a company purchases an
    • Salvage Value: The estimated value of the equipment for $10,000 with a useful life of
    asset at the end of its useful life. 5 years. The sum of the years' digits for
    • Useful Life of Asset: The estimated period this asset is 15 (1+2+3+4+5). The
    during which the asset will be used to depreciation expense for each year would
    generate revenue or provide services. be

    Examples:  Year 1: (5/15) x $10,000 = $3,333.33

    • Let's say a company purchases a machine  Year 2: (4/15) x $10,000 = $2,666.67


    for $50,000 that has a useful life of 10
     Year 3: (3/15) x $10,000 = $2,000.00
    years and a salvage value of $5,000. Using
    the straight-line method, the annual  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 • It is simple and easy to understand.
    • is a type of accelerated depreciation • It provides a steady and predictable rate of
    method that allows a company to write off depreciation.
    the value of an asset more quickly than the
    • It is widely accepted by accounting
    straight-line method. This method is often
    standards.
    used for assets that depreciate more rapidly
    in the early years of their useful life. Disadvantages:
    • The formula for the double-declining • It does not reflect the actual usage of the
    balance method is: asset.
    • Depreciation expense = (2 / Useful life) x • It does not account for the differences in
    Book value at the beginning of the year the asset's efficiency over time.
    • Where: • It results in a higher book value for older
    assets.
    • Useful life is the estimated number of
    years that the asset will be used before it is Declining Balance Method
    retired or disposed of.
    Advantages:
    • Book value is the cost of the asset minus
    the accumulated depreciation. • It provides a higher depreciation expense
    in the earlier years of an asset's life.
    • To illustrate how this method works,
    let's say a company buys a machine for • It reflects the actual usage of the asset.
    $100,000 with an estimated useful life of Disadvantages:
    five years and no salvage value. Using the
    double-declining balance method, the • It can be complex to calculate.
    depreciation expense for the first year • It can result in a very low book value for
    would be: older assets.
    • Depreciation expense = (2 / 5) x $100,000 • It may not be accepted by some accounting
    = $40,000 standards.
    • The book value of the machine at the end Sum of the Years' Digits Method
    of the first year would be:
    Advantages:
    • Book value = $100,000 - $40,000 =
    $60,000 • It provides a higher depreciation expense
    in the earlier years of an asset's life.
    • For the second year, the depreciation
    expense would be: • It reflects the actual usage of the asset.

    • Depreciation expense = (2 / 5) x $60,000 = • It is a more accurate method of


    $24,000 depreciation than the straight-line method.

    • The book value of the machine at the end Disadvantages:


    of the second year would be: • It can be complex to calculate.
    • Book value = $60,000 - $24,000 = $36,000 • It can result in a very low book value for
     And so on, until the end of the asset's older assets.
    useful life.
    Straight-line Method
    Advantages:

    You might also like