depreciation by any method (diminishing or straight line)
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What Are the Main Types of Depreciation Methods?
There are several types of depreciation expense and different formulas for determining the book value of an asset. The most common depreciation methods include:
Straight-line
Double declining balance
Units of production
Sum of years digits
Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life. In other words, it is the reduction in the value of an asset that occurs over time due to usage, wear and tear, or obsolescence. The four main depreciation methods mentioned above are explained in detail below.
Depreciation Expense = (Cost – Salvage value) / Useful life
Example
Consider a piece of equipment that costs $25,000 with an estimated useful life of 8 years and a $0 salvage value. The depreciation expense per year for this equipment would be as follows:
Straight Line Depreciation Formula
Depreciation Expense = ($25,000 – $0) / 8 = $3,125 per year
Straight Line Depreciation Chart
#2 Double Declining Balance Depreciation Method
Compared to other depreciation methods, double-declining-balance depreciation results in a larger amount expensed in the earlier years as opposed to the later years of an asset’s useful life. The method reflects the fact that assets are typically more productive in their early years than in their later years – also, the practical fact that any asset (think of buying a car) loses more of its value in the first few years of its use. With the double-declining-balance method, the depreciation factor is 2x that of the straight-line expense method.
Depreciation formula for the double-declining balance method:
Periodic Depreciation Expense = Beginning book value x Rate of depreciation
Example
Consider a piece of property, plant, and equipment (PP&E) that costs $25,000, with an estimated useful life of 8 years and a $2,500 salvage value. To calculate the double-declining balance depreciation, set up a schedule:
Double Declining Balance Depreciation Formula
The information on the schedule is explained below:
The beginning book value of the asset is filled in at the beginning of year 1 and the salvage value is filled in at the end of year 8.
The rate of depreciation (Rate) is calculated as follows:
Expense = (100% / Useful life of asset) x 2
Expense = (100% / 8) x 2 = 25%
Note: Since this is a double-declining method, we multiply the rate of depreciation by 2.
3. Multiply the rate of depreciation by the beginning book value to determine the expense for that year. For example, $25,000 x 25% = $6,250 depreciation expense.
4. Subtract the expense from the beginning book value to arrive at the ending book value. For example, $25,000 – $6,250 = $18,750 ending book value at the end of the first year.
5. The ending book value for that year is the beginning book value for the following year. For example, the year 1 ending book value of $18,750 would be the year 2 beginning book value. Repeat this until the last year of useful life.
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