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What Are The Main Types of Depreciation Methods?: Depreciation Expense Book Value

There are four main types of depreciation methods used in accounting: straight-line, double declining balance, units of production, and sum of years digits. Depreciation expense allocates the cost of a tangible asset over its useful life. The two most common methods are straight-line, which uses an equal depreciation amount each year, and double declining balance, which results in a larger depreciation in early years by using a rate of 2x the straight-line rate.

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108 views4 pages

What Are The Main Types of Depreciation Methods?: Depreciation Expense Book Value

There are four main types of depreciation methods used in accounting: straight-line, double declining balance, units of production, and sum of years digits. Depreciation expense allocates the cost of a tangible asset over its useful life. The two most common methods are straight-line, which uses an equal depreciation amount each year, and double declining balance, which results in a larger depreciation in early years by using a rate of 2x the straight-line rate.

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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:

1. Straight-line
2. Double declining balance
3. Units of production
4. 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.

1. Straight-Line Depreciation Method

Straight-line depreciation is a very common, and the simplest, method of


calculating depreciation expense. In straight-line depreciation, the expense
amount is the same every year over the useful life of the asset.

Depreciation Formula for the Straight Line Method:

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:

 
 

Depreciation Expense = ($25,000 – $0) / 8 = $3,125 per year

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:

The information on the schedule is explained below:

1. 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.
2. 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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