depreciation methods

Depreciation Methods 2024 and How to Calculate

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A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. However, the depreciation method used should reflect as fairly as possible the pattern in which the asset’s economic benefits are expected to be consumed by the entity.

depreciation methods

The four common methods of depreciation are discussed below:

  • Straight Line Method
  • Reducing balance method
  • Units of production method
  • Sum of Years digit method

Straight line depreciation

In this method, the depreciable amount is charged in equal amounts to each reporting period over the expected useful life of the asset. With the straight-line method, the annual depreciation charge is the same for each full financial year over the life of the asset. This is the most common method in practice and the easiest to calculate.

π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘› = (πΆπ‘œπ‘ π‘‘βˆ’π‘…π‘’π‘ π‘–π‘‘π‘’π‘Žπ‘™ π‘£π‘Žπ‘™π‘’π‘’) / π‘ˆπ‘ π‘’π‘“π‘’π‘™ 𝑙𝑖𝑓𝑒

π΄π‘™π‘‘π‘’π‘Ÿπ‘›π‘Žπ‘‘π‘–π‘£π‘’π‘™π‘¦, π‘‘π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘› = πΆπ‘œπ‘ π‘‘ Γ— π‘…π‘Žπ‘‘π‘’

(π‘…π‘Žπ‘‘π‘’ = π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘π‘™π‘’ π‘Žπ‘šπ‘œπ‘’π‘›π‘‘πΆπ‘œπ‘ π‘‘ Γ— π‘ˆπ‘ π‘’π‘“π‘’π‘™ 𝑙𝑖𝑓𝑒)

Reducing balance method

In this method, we will charge annual depreciation with a fixed percentage of the carrying amount of the asset at the start of the period which results in a gradually lower depreciation charge as the asset’s efficiency is reduced over its useful life.

Β π‘…π‘Žπ‘‘π‘’ = 1βˆ’π‘›π‘’π‘šπ‘π‘’π‘Ÿ π‘œπ‘“ π‘¦π‘’π‘Žπ‘Ÿπ‘  √ π‘…π‘’π‘ π‘–π‘‘π‘’π‘Žπ‘™ π‘£π‘Žπ‘™π‘’π‘’πΆπ‘œπ‘ π‘‘

Β π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘› = 𝑁𝑒𝑑 π‘π‘œπ‘œπ‘˜ π‘£π‘Žπ‘™π‘’π‘’ Γ—π‘…π‘Žπ‘‘π‘’

Units of production method

In this method, we will calculate depreciation expressing the useful life of an asset in terms of its expected total output and allocating the annual charge to depreciation based on actual output. The higher the usage, the higher the depreciation charge, and vice versa.

π‘…π‘Žπ‘‘π‘’ = (πΆπ‘œπ‘ π‘‘βˆ’π‘…π‘’π‘ π‘–π‘‘π‘’π‘Žπ‘™ π‘£π‘Žπ‘™π‘’π‘’) / π‘ˆπ‘ π‘’π‘“π‘’π‘™ 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑒𝑛𝑖𝑑𝑠

π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘› = π‘ˆπ‘›π‘–π‘‘π‘  𝑒𝑠𝑒𝑑 π‘œπ‘Ÿ π‘π‘Ÿπ‘œπ‘‘π‘’π‘π‘’π‘‘ Γ—π‘…π‘Žπ‘‘π‘’

The sum of year digits method

In this method, we will calculate depreciation by multiplying the depreciable amount by a fraction where the numerator is the remaining life of the asset at the start of the period and the denominator is the sum of all the years’ useful life at the start of ownership. This method results in stepwise lower depreciation in later years of useful life.

π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘› = (π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘π‘™π‘’ π‘Žπ‘šπ‘œπ‘’π‘›π‘‘ Γ— π‘…π‘’π‘šπ‘Žπ‘–π‘›π‘–π‘›π‘” π‘¦π‘’π‘Žπ‘Ÿπ‘ ) / π‘†π‘’π‘š π‘œπ‘“ π‘¦π‘’π‘Žπ‘Ÿπ‘ β€²π‘‘π‘–π‘”π‘–π‘‘π‘ 

we can calculate the Sum of years’ digits: =𝑛(𝑛+1)/2

Frequently Asked Questions

What is depreciation?

Β The value of these assets decreases over time after their purchase because of wear and tear (i.e. use of the asset) and obsolescence.

What is the formula for annual depreciation?

The formula for calculation of annual depreciation using the straight-line method:

(cost – salvage value) / useful life.Β 

What is the best example of depreciation?

An example of Depreciation – If a delivery truck is purchased by a company with a cost of Rs. 100,000 and the expected usage of the truck is 5 years, the business might depreciate the asset under depreciation expense as Rs. 20,000 every year for 5 years.

What are the two methods of depreciation?
Straight-Line MethodDiminishing Balance Method
The depreciation is charged at a fixed rate on the original cost of the asset.The depreciation is charged at a fixed rate on the written down value or diminishing value of the asset.

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