Most common methods of Depreciation

Master Depreciation Accounting with Advanced Excel Model Various methods of depreciation and Depreciation Accounting
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Transcript

In this section we'll be discussing various methods of depreciation. I will be discussing three main methods of depreciation which are generally used by various businesses around the globe. These methods are practical to use in most common kinds of assets straight line method, straight line method charges the same amount of depreciation expense in every reporting period. This approach probably approximates the average usage of asset so it is a reasonable way to match revenue to expense. It is also easiest deposition method to calculate which makes it for the most commonly used deposition method. Later section of this course we'll be using a productive session template which will be based on shape and method.

While I'll be uploading more templates for other methods as well in future let's take an example. Suppose you bought an office equipment what $50,000 with an estimated useful life or five years, salvage value is estimated to be $5,000 efficient expense ditcher would be around $9,000 per year, which is 50,000 which is cost of an asset minus 5000, which is a salvage value divided by number of years of useful life which is five years. So definition would be 9000 per year or 750 dollars per month. This table shows the brief calculation of depreciation over its useful life. So, every year definition remains fixed which is $9,000 end of year five you see that a patient has only solid value of $5,000 which is matches with our estimated salvage value. Now, let's discuss advantages and limitations of SLM methods straight line method.

This method is very simple to understand and easy to apply every year same amount of depreciation is charged so comparison becomes very easy. most suitable for asset which useful life can be estimated accurately and use open asset is consistent throughout its life limitations. This method suffers from a faulty assumption of similarity of assets in the accounting period. So, in other words, we are assuming that each share of its useful life the use of asset would be seen, which is not practical in real life as asset might be used differently in different years. final years of life of the asset how to bear more repairs and maintenance charges which is practical also we have to charge same amount of depreciation while initial years have to suffer lesser repair charges. second method of depreciation which is commonly used is declining balance method or written down value method.

Under ww method depreciation is charged on the book value of the assets as the book value keeps on reducing by annual charge of the depreciation. This method also known as reducing balance method, appreciation is calculated at predetermined rate or depletion on net book value at the beginning of the amount of depreciation reduces our year after year. rate is determined by following equation for web method rate is equal to one minus and power of s divided by C as 10. For salvage value C stands for cost of an asset and for useful life of the assets. Let's take an example. The example would be cost of an asset $50,000 is pulled a five year salary value 5000, the rate of reputation will be determined by rate which is one minus five to power of 5000 divided by 50,000 into hundred into hundred is done.

To make this calculation result into percentage, the percentage would be 36.9%. You can also use power function in Excel to determine the rate of deposition in a web method, the rate would be one minus power and the argument would be s divided by C comma one divided by n. So in our example, it would be one minus power pi thousand divided by 50,000 coma one divided by five which is useful life of that asset and you will get the result of 36.9% note that DB function in Excel works out the yearly and monthly depreciation in same method. So, you need not to use power function at all you can use the DB function in Excel to figure out the efficient and under written down value method. Under ww method or DB method, the depreciation would be higher in earlier years of acid life as you can see in the table here $18,000 is charged compared to $9,000 under SLM method, as you can see, deposition is gradually reducing and charge at higher rate in earlier years.

At the same time, deposition is charged on the net book value of previous year. So first year, the President is on the main cost of asset which is $50,000 car on the year to the opening balance is 31,005 40 on which the deposition will be applied, which is the rate we calculated 36.9%. at end of second year, the repetition value is 19,009 05. again on the third year, that appreciation be charged at the rate we calculate it on 19,009 05 and so on 10 of the year five you see that wt V is 5000 which is the salvage value of the asset. As I said before you can use DB function in Excel to calculate same amount of depreciation You need not to go through the formula provided, but this is just for your understanding how web method and the rate of depreciation works. Now, let's talk about advantages and limitations of web method DB method.

This method assumes that benefit from the asset go on diminishing with this passage of time so higher deposition is charging earlier. So assets life the large portion of cost of an asset is written off in earlier years lost due to obsolete gets to use. This method is best suited for fixed assets which lasts for longer period of time and requires an increased amount of repairs maintenance in later part of its useful life. So this is the most practical method of deposition and what are the limitations of this method. The precision cost An asset cannot be fully depreciated which will always have some value. So, the value of asset cannot be zero and it is very difficult to ascertain appropriate rate of deposition under this method.

The third and the last method of depreciation I'll be discussing in this section is double declining balance method. The double declining balance depreciation method is accelerated depreciation method that counts twice as much as of assets book value each year as an expense compared to state and method of depreciation. The depreciation formula is two into straight line depreciation person into book value at the beginning of the period. Let's take an example continue with the same figures as we used in the previous examples. So, beginning of the year as you can see, the cost of an asset is 50,000. So, depreciation is calculated by 50,000 divided by five which is 10,000 into two So, 20,000 So, book value would be 30,000.

At the end of the beginning of second year, the book value is carried forward as 30,000. So, the vision for the ATR would be 30,000 divided by five which is $6,000 into two which is 12,000. So, the net book value would be 18,000 at end of year two, in the third year, that book value is 18,000 and appreciation is calculated 18,000 divided by five which is 3600 into two which is 7000 210,800 is your remaining value at end of year three in the fourth year 10,800 is opening value. So, depletion would be 10,800 divided by five which is 2160 into two which is 4320. So, remaining book value at end of year four will be 6480. Now, since the asset was estimated to have only five years, we will be writing off the balance between the book value at the beginning of the period which is 6480 minus the salvage value which is 5000.

The balance of depreciation in year five will be 1480. As you can see, excellent amount of deposition is charge for the earlier years of life of an asset. The advantages and limitations of this method would be similar to WWE method, which is a method to as we have discussed in earlier slides. Now finally, let's compare the depreciation charge every year for these three methods. As you can see, the DV method and DDP method has accelerated amount of depreciation in early years open assets life, while SLM method assumes same amount of depreciation throughout the useful life of an asset. This method you should choose for your assets and business depends upon this how you conduct your business how your assets are used.

Every method has its advantages and disadvantages.

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