7: Depreciation

Depreciation

the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible.

Asset’s cost

includes all costs necessary to get the asset in place and ready for use.

Estimated salvage value

the amount that the company will receive at the end of the asset's useful life.

estimated useful life

the number of years (or the total units of output) that the asset is expected to be used.

Straight line method

the most common method used for computing and reporting depreciation on a company's financial statements.

unit of production

This method uses an asset's output (instead of years) as an indicator of its useful life

Double-declining balance

This method provides more depreciation expense in the early years of the asset's useful life and therefore less depreciation expense in the later years of the asset's life.

Sum of the years’ digits

another accelerated method of depreciation. This means that a company will report more depreciation expense in the earlier years of the asset's useful life and less depreciation in the later years.

Unit of production

is a method of calculating the depreciation of the value of an asset over time. It becomes useful when an asset's value is more closely related to the number of units it produces rather than the number of years it is in use.

Diminishing Balance

Depreciation rate is charged on the reducing balance of the asset. This asset is the one reflected in the books of accounts at the beginning of an accounting period.