All Depreciation Methods for Fixed Asset | Non-Current Asset
After you read this article, you will know all depreciation methods. There are many depreciation methods such as straight-line, declining-balance, double declining balance, units-of-production and sum-of-the-years’ digits. Each depreciation method that can be used is based on actual physical usage or nature of the fixed asset.
Assume that ABC Company purchases tangible fixed asset Y for $66,000. Salvage value is $6,000. The expected useful life is 5 years.
Depreciation expense for each year =( cost of fixed asset – salvage value)/useful life.
Meaning of Straight-Line is as follows:
Depreciation expense year 1 = depreciation expense year 2= depreciation expense year 3 so on.
This method spreads the cost of the fixed asset evenly over its useful life. When the straight-line method is used, the salvage value reduces the depreciable base.
According to our example, depreciation expense = (66,000-6,000)/5=$12,000
So depreciation expense for each year ( 1,2,3,4,5)=$12,000, and at end of year 5 has salvage value ( scrap value) and net book value = $6,000.
2.Double declining balance method
Depreciation Expense at Year T = NBV (Year T-1) x 2 x Straight Line rate.
Net book value (NBV) = cost – accumulated depreciation
The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation or the multiplier is 2 of straight-line depreciation rate, is a common form of accelerated depreciation. This means that the double declining balance method will result in greater depreciation expense in each of the early years and smaller depreciation expense in the later years of an asset’s life as compared to straight line depreciation.
According to our example, straight line depreciation is 20% ( 1/5), so depreciation factor = 20% x 2 = 40% = 0.4.
Please note that year 5 net book value ($6,000) is salvage value and depreciation expense ($2,554) is balancing between $60,000 and $57,446.
Units-of-production is an activity method because you compute depreciation on actual physical use, so it means that we need to estimate the total estimated number of units the fixed asset will produce over its expected useful life. Depreciation expense for each year is based on year units produced.
According to our example, we assume that fixed asset A produced 120,000 units for five years, so depreciation rate per unit = ($66,000-$6,000)/120,000 = $0.5 per unit. Produced units and depreciation expense for each year are as follows:
For this method, we will come up with a depreciation fraction using the number of years of useful life.
Depreciation expense is calculated by adding all years of the fixed asset’s useful life and depreciation fraction.
For our example, all years of the fixed asset’s useful life = 5 + 4 + 3 + 2 + 1 = 15
Depreciation fraction as follows:
Year 1 = 5/15
Year 2 = 4/15
Year 3 = 3/15
Year 4 = 2/15
Year 5 = 1/15
Depreciation Expense as follows:
Depreciable amount = $66,000 – $6,000=$60,000
Year 1 = 5/15 x $60,000=$20,000
Year 2 = 4/15 x $60,000=$16,000
Year 3 = 3/15 x $60,000=$12,000
Year 4 = 2/15 x $60,000=$8,000
Year 5 = 1/15 x $60,000=$4,000
XYZ Company purchased fixed asset, car of $70,000. Useful life is 5 years, and company uses declining balance method with 30% depreciation rate.
Declining balance method of depreciation makes result in higher depreciation expense in the earlier years of ownership.
Depreciation Expense at Year T = NBV (Year T-1) x Depreciation rate.
Depreciation Expense (Y1) = cost x depreciation rate
NBV (Y1) = Cost – Depreciation expense (Y1)
Depreciation expense (Y2) = NBV(Y1) x depreciation rate
NBV(Y2) = NBV (Y1) – Depreciation expense (Y2)
Depreciation expense (Y3) = NBV(Y2) x depreciation rate
Depreciation expense (Y4)= NBV(Y3) x depreciation rate
Depreciation expense (Y5) = NBV(Y4) x depreciation rate
Year 6, 7… is the same idea.
Y= year. NBV = net book value, and NBV referred to Carrying value (CV).
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