Depreciation
Depreciation allocates the cost of long-term assets over their useful lives. Master straight-line, declining balance, units of production, and sum-of-years-digits methods.
Depreciation allocates the cost of long-term assets over their useful lives. Master straight-line, declining balance, units of production, and sum-of-years-digits methods.
Key Concepts
Study Tips
- ✓Always start by identifying: cost, salvage value, and useful life
- ✓Straight-line: (Cost - Salvage) / Useful Life
- ✓Never depreciate below salvage value with any method
- ✓Accumulated depreciation is a contra-asset account
Common Mistakes to Avoid
Students often forget to subtract salvage value before calculating straight-line depreciation, or they depreciate assets below their salvage value. Remember: book value = cost - accumulated depreciation, and it should never go below salvage value.
Related Resources
Depreciation FAQs
Common questions about depreciation
Straight-line depreciation allocates an equal amount of depreciation expense each period. Formula: (Cost - Salvage Value) / Useful Life. It's the simplest and most commonly used method.
Accelerated methods like double-declining balance are used when assets lose more value in early years. This often better matches the actual decline in an asset's productive capacity and provides larger tax deductions early on.
Accumulated depreciation is a contra-asset account that tracks total depreciation recorded over an asset's life. It's subtracted from the asset's cost to determine book value (carrying value) on the balance sheet.
Book depreciation (for financial statements) typically uses straight-line or methods that match the asset's benefit pattern. Tax depreciation (MACRS in the U.S.) uses accelerated schedules set by the IRS to allow larger deductions in early years. Companies maintain both simultaneously, creating temporary differences that result in deferred tax liabilities.