Depreciation Methods
Depreciation is the systematic allocation of the cost of a tangible long-lived asset over its useful life, using methods such as straight-line, declining balance, or units of production.
Explanation
Straight-line depreciation allocates an equal amount of expense each period: (cost - salvage value) / useful life. Double-declining balance applies twice the straight-line rate to the declining book value each period, ignoring salvage value until the final years. Sum-of-the-years'-digits is an accelerated method that applies a declining fraction to the depreciable base.
Units of production ties depreciation to actual usage rather than time. A change in depreciation method is treated as a change in accounting estimate effected by a change in principle — applied prospectively. Component depreciation (separately depreciating significant parts of an asset) is required under IFRS but not mandated under U.S. GAAP.
Key Points
- •Straight-line: equal expense each period
- •Double-declining balance: accelerated, 2 × straight-line rate applied to book value
- •Units of production: based on actual usage, not time
- •Change in method applied prospectively
Exam Tip
Be comfortable calculating depreciation under all methods for any given year. Know that a change in useful life or salvage value is a change in estimate (prospective).
Frequently Asked Questions
Related Topics
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Intangible assets are identifiable non-monetary assets without physical substance, such as patents, trademarks, copyrights, and customer lists, recognized at cost and amortized over their useful lives if finite.
Balance Sheet (Statement of Financial Position)
The balance sheet reports an entity's assets, liabilities, and equity at a specific point in time, following the fundamental accounting equation: Assets = Liabilities + Equity.
MACRS Depreciation
The Modified Accelerated Cost Recovery System (MACRS) is the primary depreciation method for tax purposes, assigning assets to recovery periods with prescribed depreciation methods and conventions.
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