In the U.S., accountants have to follow generally accepted accounting principles (GAAP) in the calculation and reporting of depreciation in financial statements. GAAP has several allowable methods of depreciation.
The Linear Method Of Depreciation
The linear method uses the estimated residual value (scrap value) of the asset at the end of his life, and then subtracts this value from its original cost. The difference is equal to the value that is lost during productive use of the asset. Once you have decided that this number is divided by the best-guess management’s estimate of the number of years during which the asset will be useful.
A Declining Balance Depreciation
Method declining balance, a type of accelerated depreciation is a method of writing off depreciation costs more quickly, and minimize tax risks. The most common form of declining balance double declining balance, which is calculated by multiplying the straight-line rate by two (2).
As a rule, declining balance method, you apply a higher depreciation in the first year of the asset, and then gradually decreases depreciation expense in future years.
The sum-of-years digits depreciation
The sum-of-years method’ digits offers as a course that accelerates a more linear method, but less than declining balance method. The annual depreciation is separated into fractions using the number of years of useful life of the asset.
For example, an asset with a useful life of five years will have a sum-of-years value 15 (5 + 4 + 3+ 2 + 1). The first year is assigned the value 5, the second year a value of 4 and so on. Depreciation for the first year’s direct cost multiplied by a fraction in the first year (5 ÷ 15, or one-third).
Units of production depreciation
Units of production assigns an equal expense rate for each unit of production, making it the most useful for Assembly or production lines. The formula involves the use of historical cost and estimated liquidation value and subsequent determination of the expense for the reporting period multiplied by the number of units that are produced.