2. Depreciation is an accounting method to allocate the cost of a tangible asset over its
useful life. This depreciation can be derived from three main reasons: wear due to
use, the passage of time and old age.
Depreciation is a method of costal location. Depreciation can be calculated in more than one
way.
4. The simplest and most commonly used method, straight-line depreciation is calculated by taking the
purchase or acquisition price of an asset, subtracting the salvage value and dividing by the total productive
years for which the asset can reasonably be expected to benefit the company.
For $50,000, Company ABC purchased a machine that will have an estimated useful life of
five years. The company also estimates that in five years, the company will be able to sell
it for $5,000 for scrap parts.
Straight-line depreciation produces a constant depreciation expense. At the end of the asset's useful life, the
asset is accounted for in the balance sheet at its salvage value.
5. • Simple, easy to understand and to apply .
• It provides uniform charge every year.
• It´s calculated on original cost over the life time
• Constant distribution.
• The method allows us to reach the waste value in a simple way.
• Depreciation is not related to the usage factor.
• It ignores the fact that in the later years of the life of the asset, efficiency of the asset declines.
• Loss of interest on investment in the asset is not accounted for
• It does not take into account the interests generated by the reserve fund.
• It does not take into account that fixed assets depreciate in a greater proportion in the first years in recent
years
6. The DDB method simply doubles the straight-line depreciation amount that is taken in the first year, and then
that same percentage is applied to the un-depreciated amount in subsequent years.
DDB In year i = (2 / n) * (total acquisition cost – accumulated depreciation)
n = number of years
7. • It is a relatively easy method to apply.
• Assign a higher depreciation charge to the first years, which is when the Goods effectively
lose more value.
• Take into account that fixed assets depreciate in a greater proportion in the first years in
recent years.
• Like the straight lines method, it does not take into account the interests generated by the
reserve fund.
• It does not take into account the interests generated by the reserve fund.
• The last depreciation has to be adjusted in order to arrive at the disposal value of the asset.
8. The sum-of-year depreciation method produces a variable depreciation expense. At the end of the
useful life of the asset, its accumulated depreciation is equal to the accumulated depreciation under
the straight-line depreciation.
Depreciation In Year I = ((n-i+1) / n!) * (total acquisition cost – salvage value)
For $50,000, Company ABC purchased a machine that will have an estimated useful life
of five years. The company also estimates that in five years, the company will be able to
sell it for $5,000 for scrap parts.
n! = 1+2+3+4+5 = 15
n = 5
9. • Take into account that fixed assets depreciate in a greater proportion in the first years in recent years.
• The sum years’ digits depreciation method as one of accelarated depreciation methods better matches
costs to revenues because it takes more depreciation in the early years of an assets’ useful life compare to
the straight line depreciation method.
• This method reflects more accurately the difference in usage of different assets from one period to the
other compare to the straight line depreciation method
• SYD depreciation method might be more confusing and harder to compute compare to the straight line one
• It does not take into account the interests generated by the reserve fund.
• The last depreciation has to be adjusted in order to arrive at the value of the asset's disposal.
• It has declining amounts of depreciation expense. Declining amounts of depreciation expense usually
offsets by increasing the maintenance expense which might smooth the income over the years
10. This method provides for depreciation by means of a fixed rate per unit of production. Under this method, one must
first determine the cost per one production unit and then multiply that cost per unit with the total number of units
the company produced with in an accounting period to determine its depreciation expense.
Depreciation Expense =Total AcquisitionCost – SalvageValue / EstimatedTotal Units
Company ABC purchased a machine for
$2 million that can produce 300,000
products over its useful life. The
company estimates that this machine
has a salvage value of $200,000.
11. • Reflect more closely actual depreciation of assets with different levels of activity
• Matches more accurately cost with revenue
• Relates depreciation to activity of an depreciable asset
• if a depreciable asset has no activity, there won’t be any depreciation expensed regardless that
machinery losing value making this accounting method unacceptable
• Cannot be applied to all depreciable assets equally (items such as building or furniture which
depreciation depends on passage of time)
• Calculations can be complex if perform them manually
