How is depreciation value calculated for an asset in assets management?

Straight line depreciation

Straight line depreciation is likely to be the most common method of matching a plant asset’s cost to the accounting periods in which it is in service. Under the straight line method of depreciation, each full accounting year will be allocated the same amount or percentage of an asset's cost. The total amount of depreciation over the years of the asset's useful life will be the asset's cost minus any expected or assumed salvage value.Example: The company purchases equipment at a cost of USD: 430,000 and it is expected to be used in the business for 10 years. At the end of the 10 years, the company expects to receive a salvage value of USD: 30,000. Under the straight line method each full accounting year will be allocated USD: 40,000 of depreciation, which is one-tenth (1/10) or 10% of the USD: 400,000 that need to be depreciated over the useful life of the equipment. If the asset is purchased in the middle of the accounting year there will be USD: 20,000 of depreciation in the first and the eleventh accounting year and USD: 40,000 in each of the years.

The calculation and reporting of depreciation is based upon two accounting principles: 

1. Cost Principle: This principle requires that the depreciation expense reported on the income statement, and the asset amount that is reported on the balance sheet, should be based on the historical (original) cost of the asset.

    

2. Matching Principle: This principle requires that the asset's cost be allocated to depreciation expense over the life of the asset. In effect the cost of the asset is divided up with some of the cost being reported on each of the income statements issued during the life of the asset.

 Accelerated Depreciation

Accelerated depreciation is an alternative to the straight-line depreciationmethod. Compared to the straight-line method, accelerated depreciation methods provide for more depreciation in the early years of an asset's life but then less depreciation in the later years. Accelerated depreciation will mean larger Depreciation Expense in the early years of the asset's life and then smaller Depreciation Expense in the later years.

Various Accelerated Depreciation Methods:

There are various methods of accelerated depreciation. Here are some of them:

• Double-declining balance (also known as the 200% declining balance)
• 150% declining balance
• 125% declining balance
• Sum-of-the-years' digits