# State And Explain Two Methods Of Depreciation Pdf

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Published: 04.06.2021  In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. An example of fixed assets are buildings, furniture, office equipment, machinery etc..

## What Are the Different Ways to Calculate Depreciation?

Depreciation is used to gradually charge the book value of a fixed asset to expense. There are several methods of depreciation, which can result in differing charges to expense in any given reporting period. The following are the general methods of depreciation available for use:. Straight line. The straight-line method charges the same amount of depreciation to expense in every reporting period. This approach probably approximates the average usage pattern of most assets, and so is a reasonable way to match revenues to expenses.

It is also the easiest depreciation method to calculate, which makes it by far the most commonly-used depreciation method. Using this approach makes it easier to close the books at the end of each month, since it is so simple to calculate. An accelerated depreciation method is designed to charge the bulk of the depreciable amount of a fixed asset to expense as soon as possible, with a rapidly-declining amount being charged to expense in later periods.

Examples of this method are the double-declining balance method and the sum of the years' digits method. This approach is useful for depressing short-term profits in order to reduce the amount of taxable income. However, it is difficult to calculate, usually does not reflect the actual usage pattern of a fixed asset, and skews the reported results of a business. Usage based. A usage-based depreciation method is designed to have a variable periodic depreciation expense that is based on the amount that a fixed asset is actually used.

An example of this method is the units of production method. This is the most accurate of the depreciation methods in matching actual usage to the related depreciation expense, but suffers from an inordinate amount of record keeping to track usage levels. Given this problem, it is usually restricted to the more expensive fixed assets whose usage levels vary considerably over time. Of the methods of depreciation noted here, the most practical one is the straight-line method, since it requires minimal upkeep and is the easiest to understand.

The only value of an accelerated method is in deferring the payment of income taxes. A usage-based method should not be used unless there is a demonstrable need for an increased level of depreciation accuracy, since it is a time-consuming approach.

Any method of depreciation is time-consuming over the lifespan of an asset, and so is not efficient. To improve the efficiency of the accounting staff, set a high capitalization threshold , below which all expenditures are charged to expense as incurred.

Doing so can eliminate a large number of depreciation calculations. From an auditing perspective, it is best to use the straight-line method, since these calculations are easiest for auditors to verify. This can reduce the annual audit fee charged to a business. Books Listed by Title. Articles Topics Index Site Archive.

About Contact Environmental Commitment. What are the Most Common Depreciation Methods? The following are the general methods of depreciation available for use: Straight line. Inventory turnover definition Carbon credit definition. Copyright ## What Is Depreciation?

Depreciation is used to gradually charge the book value of a fixed asset to expense. There are several methods of depreciation, which can result in differing charges to expense in any given reporting period. The following are the general methods of depreciation available for use:. Straight line. The straight-line method charges the same amount of depreciation to expense in every reporting period.

Image: Methods of providing depreciation. Under this method, a fixed percentage of original cost is written off the asset every year. Thus, if an asset costs Rs. The amount to be written off every year is arrived at as under:. The period for which the asset is used in a particular year should also be taken into account. This method is simple in calculation and also in such a case, the charge to the Profit and Loss Account is uniform every year.

Cost of a fixed asset must be charged to the income statement in a manner that best reflects the pattern of economic use of assets. Straight Line Depreciation. Reducing Balance Depreciation. Sum of the Year' Digits Depreciation. Units of Activity Depreciation. Following diagram illustrates the effect of using different depreciation methods on yearly depreciation expense:. Depreciation charge varies in line with the change in number of machine hours consumed each year. ## Depreciation Methods

A depreciation method is the systematic manner in which the cost of a tangible asset is expensed out to income statement. Popular depreciation methods include straight-line method, declining balance method, units of production method, sum of year digits method. Amount spent on acquisition of an asset is initially recorded as an asset on balance sheet and charged to income statement over the useful life of the asset. In accountancy , depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset , such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used depreciation with the matching principle. Depreciation is thus the decrease in the value of assets and the method used to reallocate, or "write down" the cost of a tangible asset such as equipment over its useful life span.

### 7 Important methods of providing depreciation | Example | Formulae

By Sathish AR. Depreciation is the accounting process of converting the original costs of fixed assets such as plant and machinery, equipment, etc into the expense. It refers to the decline in the value of fixed assets due to their usage, passage of time or obsolescence. Furthermore, depreciation is a non — cash expense as it does not involve any outflow of cash. Hence, depreciation as an expense is different from all the other conventional expenses. However, there are different factors considered by a company in order to calculate depreciation. One such factor is the depreciation method.

A business wants to deduct expenses against revenues in the most effective fashion possible. But being effective doesn't mean that you always deduct an expense immediately. Depreciation allocates the cost and expense of tangible and real assets over the assets' useful life. Depending on the type of asset, a business might depreciate an asset over a period of up to 30 years. These methods of depreciation are recognized as appropriate accounting principals by the Internal Revenue Service IRS. Businesses that don't follow the proper methods of accounting and depreciation could end up paying penalties, if audited by the IRS. Depreciation takes the tangible assets purchased in one year and allows a company to write off their purchase value, over time.

GAAP is a set of rules that includes the details, complexities, and legalities of business and corporate accounting. GAAP guidelines highlight several separate allowable methods of depreciation that accounting professionals may use. There are four methods for depreciation: straight line, declining balance, sum-of-the-years' digits, and units of production. The difference is the value that is lost over time during the asset's productive use. That difference is also the total amount of depreciation that must be expensed. With the declining balance method, management expenses depreciate at an accelerated rate rather than evenly over a scheduled number of years. This method is often used if an asset is expected to have greater utility in its earlier years.

There are four methods for depreciation: straight line, declining balance, sum-of-the-years' digits, and units of production. #### Types of depreciation

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