Types of Depreciation and how to do it

✅ 1. Straight Line Method (SLM)

📌 Definition:

This is the simplest and most commonly used method. The asset depreciates by the same amount each year.

🧮 Formula:

$$ \text{Annual Depreciation} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful Life}} $$

• Cost of Asset: Initial purchase price.
• Salvage Value: Estimated value at the end of the asset’s useful life.
• Useful Life: Expected number of years the asset will be used.

📌 Example:

If a machine costs $10,000, has a salvage value of $2,000, and a useful life of 5 years:

$$ \text{Depreciation} = \frac{10,000 - 2,000}{5} = \frac{8,000}{5} = \$1,600 \text{ per year} $$

💡 Advantages:

• Simple to calculate.
• Provides consistent expense each year.

⚠️ Disadvantages:

• Doesn’t reflect the actual usage pattern of the asset.

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✅ 2. Written Down Value Method (WDV) / Reducing Balance Method

📌 Definition:

Under this method, depreciation is calculated on the book value (original cost minus accumulated depreciation) of the asset each year. The rate is usually higher in the early years and decreases over time.

🧮 Formula:

$$ \text{Annual Depreciation} = \text{Book Value} \times \text{Depreciation Rate} $$

📌 Example:

A machine costs $10,000, with a depreciation rate of 20% per annum.

Year	Book Value	Depreciation	Accumulated Depreciation	Net Book Value
1	$10,000	$2,000	$2,000	$8,000
2	$8,000	$1,600	$3,600	$6,400
3	$6,400	$1,280	$4,880	$5,120

💡 Advantages:

• Reflects the fact that assets lose more value early in their life.
• Matches revenue with expenses better for tax purposes.

⚠️ Disadvantages:

• Not suitable for all types of assets (e.g., land).

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✅ 3. Units of Production Method

📌 Definition:

Depreciation is based on the actual usage of the asset rather than time.

🧮 Formula:

$$ \text{Depreciation per Unit} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Total Estimated Units}} $$$$ \text{Annual Depreciation} = \text{Depreciation per Unit} \times \text{Units Produced} $$

📌 Example:

Machine costs $10,000, salvage value $1,000, estimated production: 9,000 units.

$$ \text{Depreciation per unit} = \frac{10,000 - 1,000}{9,000} = \frac{9,000}{9,000} = \$1 \text{ per unit} $$

If 1,000 units are produced in a year:

$$ \text{Depreciation} = 1,000 \times 1 = \$1,000 $$

💡 Advantages:

• Accurate when usage varies significantly from year to year.

⚠️ Disadvantages:

• Requires accurate estimates of total units.

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✅ 4. Double Declining Balance Method (DDB)

📌 Definition:

An accelerated depreciation method where the depreciation rate is double the straight-line rate.

🧮 Formula:

$$ \text{Depreciation Rate} = \frac{2}{\text{Useful Life}} \times 100 $$

Then apply it to the book value each year.

📌 Example:

Asset costs $10,000, useful life 5 years.

$$ \text{Rate} = \frac{2}{5} = 40\% $$

Year	Book Value	Depreciation	Accumulated Depreciation	Net Book Value
1	$10,000	$4,000	$4,000	$6,000
2	$6,000	$2,400	$6,400	$3,600
3	$3,600	$1,440	$7,840	$2,160

💡 Advantages:

• Useful for assets that lose value quickly.

⚠️ Disadvantages:

• Can result in negative book value if not adjusted.

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✅ 5. Sum of Years’ Digits Method (SYD)

📌 Definition:

Another accelerated method where depreciation is based on the sum of the digits of the asset’s useful life.

🧮 Formula:

$$ \text{Depreciation} = \left( \frac{\text{Remaining Useful Life}}{\text{Sum of Years' Digits}} \right) \times (\text{Cost} - \text{Salvage Value}) $$

📌 Example:

Asset costs $10,000, salvage $1,000, useful life 5 years.

Sum of years = 1 + 2 + 3 + 4 + 5 = 15

Year	Remaining Life	Depreciation	Accumulated Depreciation	Net Book Value
1	5	$3,000	$3,000	$7,000
2	4	$2,400	$5,400	$4,600
3	3	$1,800	$7,200	$2,800
4	2	$1,200	$8,400	$1,600
5	1	$600	$9,000	$1,000

💡 Advantages:

• Accelerated depreciation, similar to DDB.

⚠️ Disadvantages:

• More complex calculations.

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🔍 Summary Table: Types of Depreciation Methods

Method	Description	Best For
Straight Line	Same depreciation every year	Assets with even usage
Written Down Value	Depreciation based on book value	Assets that lose value fast
Units of Production	Based on actual usage	Machinery, equipment, etc.
Double Declining	Double the straight-line rate	Assets that depreciate faster
Sum of Years’ Digits	Accelerated depreciation	Assets with high initial value

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📌 Choosing the Right Method

The choice of depreciation method depends on:

• Nature of the asset
• Tax regulations
• Accounting standards (e.g., IFRS, GAAP)
• Management preferences

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Let me know if you want help calculating depreciation using any specific method or for a particular asset!