Depreciation Study Sheet

Posted by Professor Cram in Depreciation

Accounting Terms

  • An Asset is any 'thing' a business can own. Buildings, equipment, and vehicles are examples of assets that can be depreciated, while cash, bonds, and inventories are assets that are not depreciated.
  • Depreciation is the reduction in value of an asset over the course of its useful life. It can be calculated in several ways, using one of the methods described below.
  • Salvage value is the value of an asset after it has been fully depreciated. An asset's current book value must equal the salvage value at the end of its useful life.
  • A Depreciation Schedule is a chart that businesses use to show the reduction in value of an asset over the years, from its original purchase until the end of its useful life.
  • Accumulated Depreciation is an expense resulting from the asset's value reduction. It is the ongoing difference between the asset's original cost and its current value. It appears on the balance sheet as an expense in the Assets section.

Straight-Line Depreciation

  • Simplest form of depreciation
  • Annual depreciation value is the same each year
  • Given purchase price (P), salvage value (V), and years of life (Y):

    Annual Value = (P – V) / Y

Learn more about straight-line depreciation.

Units of Production Method

  • Based on the asset's lifetime capacity to do work
  • 'Units' can be measured in miles traveled, hours of operation, or widgets produced
  • Annual depreciation value changes depending on how much the asset is used
  • Given asset price (P), salvage value (V), units used in the current period U), and lifetime units capacity of the asset (L):

    Annual Value = (P – V) (U / L)

  • Cramlet™ hint: After you've determined the depreciation amount for the first year, change the current book value to the new current book value and click the 'Next' button to recalculate for the second year (and so on).

Learn more about Units of Production depreciation.

Sum-of-the-Years’-Digits Method

  • Accelerated depreciation method that assumes an asset loses most of its value early in its life
  • Annual depreciation value decreases each year
  • Given asset price (P), salvage value (V), years of life (Y), year in question (Q), and the sum of the years of life (3 years is 1+2+3=6):

    Annual Value = (P – V) ((Y + 1 – Q) / (Sum of Years))

  • Cramlet™ hint: After you've determined the depreciation amount for the first year, change the current book value to the new current book value and click the 'Next' button to recalculate for the second year (and so on).

Learn more about Sum of the Years' Digits depreciation.

Declining Balance

  • Accelerated depreciation method that assumes an asset loses most of its value early in its life
  • Annual depreciation value decreases each year
  • Depreciates an asset at one-and-one-half times the rate of straight-line depreciation
  • Given the current book value (C) and years of useful life (Y):

    Annual Value = C (1.5 / Y)

  • Depreciation in any year will be the greater of the declining balance and straight-line amounts, leaving the current book value no lower than the salvage value
  • Cramlet™ hint: After you've determined the depreciation amount for the first year, change the current book value to the new current book value and click the 'Next' button to recalculate for the second year (and so on).

Learn more about Declining Balance depreciation.

Double Declining Balance

  • Accelerated depreciation method that assumes an asset loses most of its value early in its life
  • Annual depreciation value decreases each year
  • Depreciates an asset at twice the rate of straight-line depreciation
  • Given the current book value (C) and years of useful life (Y):

    Annual Value = C (2 / Y)

  • Depreciation in any year will be the greater of the double declining balance and straight-line amounts, leaving the current book value no lower than the salvage value
  • Cramlet™ hint: After you've determined the depreciation amount for the first year, change the current book value to the new current book value and click the 'Next' button to recalculate for the second year (and so on).

Learn more about Double Declining Balance depreciation.

Share

Comments

Leave a Reply