Question

Question:In 150 words or fewer, explain the different methods that can be used to calculate depreciation. Your explanation should include how to calculate depreciation expense using each method.

Short answer

Answer

There are three main depreciation methods – Straight line, Units of production, and Double declining method.

Step-by-step solution

Meaning of Depreciation

Depreciation is the asset's cost spread over the useful life for providing benefits and charged in the income statement.

Methods of depreciation

There are generally three main methods of providing depreciation –

1) Straight Line method -Under this method, depreciation is charged by spreadingthe assets' cost equally through the estimated life of the assets.Depreciation is computed by –

$\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{R}\mathbf{e}\mathbf{s}\mathbf{i}\mathbf{d}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{L}\mathbf{i}\mathbf{f}\mathbf{e}}$

2) Units-of-production method – Under this method, depreciation is charged based on the assets’ usage or production volume. Depreciation is computed by –

$\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{R}\mathbf{e}\mathbf{s}\mathbf{i}\mathbf{d}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{L}\mathbf{i}\mathbf{f}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{u}\mathbf{n}\mathbf{i}\mathbf{t}\mathbf{s}}\mathbf{\times }\mathit{N}\mathit{o}\mathbf{.}\mathit{o}\mathit{f}\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathit{s}\mathit{u}\mathit{s}\mathit{e}\mathit{d}$

3) Double declining balance method – Thismethod is the same as the straight-line method, with the only difference being that therate is doubled compared to the straight-line method.Depreciation is computed by –

$\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{A}\mathbf{c}\mathbf{c}\mathbf{u}\mathbf{m}\mathbf{u}\mathbf{l}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{d}\mathbf{e}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{i}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{L}\mathbf{i}\mathbf{f}\mathbf{e}}\mathbf{\times }\mathbf{2}$