Depreciation Expense & Straight-Line Method w Example & Journal Entries

For the remaining years, the double-declining percentage is multiplied by the remaining book value of the asset. Kenzie would continue to depreciate the asset until the book value and the estimated salvage value are the same (in this case $10,000). We also address some of the terminology used in depreciation determination that you want to familiarize yourself Methods of Depreciation: Formulas, Problems, and Solutions with. Finally, in terms of allocating the costs, there are alternatives that are available to the company. We consider three of the most popular options, the straight-line method, the units-of-production method, and the double-declining-balance method. He is an accountant, and he is here to help companies keep their financial documents in order.

Depreciation is the method of calculating the cost of an asset over its lifespan. Calculating the depreciation of a fixed asset is simple once you know the formula. For example, if we want to increase investment in real estate, shortening the economic lives of real estate for taxation calculations can have a positive increasing effect on new construction.

Straight-line depreciation in action

Unlike the other methods, the units of production depreciation method does not depreciate the asset based on time passed, but on the units the asset produced throughout the period. This method is most commonly used for assets in which actual usage, not the passage of time, leads to the depreciation of the asset. The sum-of-the-years’-digits method (SYD) accelerates depreciation as well but less aggressively than the declining balance method. Annual depreciation is derived using the total of the number of years of the asset’s useful life. The SYD depreciation equation is more appropriate than the straight-line calculation if an asset loses value more quickly, or has a greater production capacity, during its earlier years.

• The formula determines the expense for the accounting period multiplied by the number of units produced.
• If so desired, the company could continue to use the asset beyond the original estimated economic life.
• A common method is to allocate depreciation expense based on the number of months the asset is owned in a year.
• These assets are considered natural resources while they are still part of the land; as they are extracted from the land and converted into products, they are then accounted for as inventory (raw materials).
• If we do not use depreciation in accounting, then we have to charge all assets to expense once they are bought.
• As the name suggests, it counts expense twice as much as the book value of the asset every year.

He is here at your printing company today to help you choose a depreciation method. Whatever value is lost per year in your equipment you can write in your financial reports and then transfer the appropriate amount to your year-end taxes. By doing this, you are taking into account that your equipment loses value each year, and that affects your company’s bottom line.

Depreciation Problems and Answers

Only one calculation method is active at a certain point in time for a depreciation key. Mid period, Pro rata at period start date, at the start of year or At mid year etc. E.g., If client requires to depreciate an asset from the First day of the year in which the asset is capitalised, we can use the method `At the start of the Year` in case of Acquisition. Generally, If we uses Straight line method, then depreciation amount should be same for all years.

With the straight line depreciation method, the value of an asset is reduced uniformly over each period until it reaches its salvage value. Straight line depreciation is the most commonly used and straightforward depreciation method for allocating the cost of a capital asset. It is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset. As per the double declining method, the asset’s depreciation expense in years 1 and 2 are $700,000 and $560,000, respectively.

Example: Calculating straight-line depreciation for a fixed asset

The double-declining balance method is a form of accelerated depreciation. It means that the asset will be depreciated faster than with the straight line method. The double-declining balance method results in higher depreciation expenses in the beginning of an asset’s life and lower depreciation expenses later.

• Sum-of-the-years’ digits depreciation does the same thing but less aggressively.
• However, when the units of production method is used, the life in years is of no consequence.
• The new value of the machinery is then multiplied by 2 times the depreciation percentage to determine the new depreciation.
• The units-of-production depreciation method bases depreciation on the actual usage of the asset, which is more appropriate when an asset’s life is a function of usage instead of time.

Moreover, the machinery is expected to produce 200,000 units over its useful life of 10 years. In this example, let us calculate the depreciation for an asset using all four depreciation formulas. In this method, we assign the item’s total loss of value over the time that we use it.

Next, because assets are typically more efficient and “used” more heavily early in their life span, the double-declining method takes usage into account by doubling the straight-line percentage. The declining balance method of depreciation does not recognize depreciation expense evenly over the life of the asset. Rather, it takes into account that assets are generally more productive the newer they are and become less productive in their later years.

To calculate the straight-line depreciation expense of this fixed asset, the company takes the purchase price of $100,000 minus the $30,000 salvage value to calculate a depreciable base of $70,000. This results in an annual depreciation expense over the next 10 years of $7,000. Similar to the declining balance method, the sum-of-the -years’-digits method accelerates depreciation, resulting in higher depreciation expense in the earlier years of an asset’s life and less in later years.

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. In 2016, the book value was $75,000, while in 2017, it fell to $60,000.