Depreciation Methods
Different approaches for allocating asset costs over time, including straight-line, accelerated, and usage-based methods with varying effects on reported income.
Depreciation Methods
Different approaches for systematically allocating the cost of tangible assets over their useful lives, each distributing the expense differently across accounting periods.
For example, using straight-line depreciation, a $100,000 asset with $10,000 salvage value and 5-year useful life would be depreciated $18,000 annually. Using double-declining balance, first-year depreciation would be $40,000 (40% of $100,000), second-year would be $24,000 (40% of $60,000), and so on.
Common depreciation methods include:
- Straight-line: equal expense each period
- Declining balance: higher expense in early years
- Sum-of-the-years-digits: accelerated but less extreme than declining balance
- Units of production: based on actual usage rather than time
The choice of method should reflect how the asset’s economic benefits are consumed. Accelerated methods often better match physical deterioration and maintenance patterns, while straight-line is simpler and often used for assets with steady benefit streams.