METHODS OF CALCULATING DEPRECIATION

1. 1.      Straight-line method
   Definition: Straight line depreciation
   Where the depreciable amount is charged in equal amounts to each reporting period over the expected useful life of the asset.
   Formula: Straight-line depreciation

   

   Straight-line depreciation

   
   
   With the straight-line method, the annual depreciation charge is the same for each full financial year over the life of the asset (unless the asset is subsequently re-valued during its life).
   This is the most common method in practice, and the easiest to calculate.
   Depreciation as a percentage of cost
   Another way of stating straight-line depreciation is to express the annual depreciation charge as a percentage of the cost of the asset. For example, suppose that an asset has an expected life of 10 years and zero residual value. If straight-line depreciation is used, the annual depreciation charge will be 10% of the cost of the asset.
   Similarly, if an non-current asset has an expected life of six years and a residual value equal to 10% of its cost, straight-line depreciation would be 15% of cost each year (= (100% – 10%)/6 years).
   
   
   
   
   2.      Reducing balance method
   Definition: Reducing balance method
   Where the annual depreciation charge is a fixed percentage of the carrying amount of the asset at the start of the period.
   Formula: Reducing balance depreciation
   

   

   Reducing balance depreciation

   
   
   The annual depreciation charge is highest in Year 1 and lowest in the final year
   of the asset’s economic life.
   
   
   Calculating the reducing balance
   The reducing balance reduces the cost of an asset down to its expected residual value over its expected useful life.
   The reducing balance percentage can be calculated using the following formula.
   Formula: Calculation of reducing balance percentage
   

   

   Calculation of reducing balance percentage

   
   
   
   3.      Sum-of-the-digits method
   Definition
   Where depreciation is calculated by multiplying the depreciable amount by a fraction where numerator is the remaining life of the asset at the start of the period and the denominator is the sum of all the years’ useful life at the start of ownership.
   This is another method of depreciation that charges the highest amount in the first year and the lowest amount in the final year.
   There following formula can be used to calculate the sum of the digits:
   Formula: Sum of the digits
   

   

   Sum of the digits

   
   
   
   
   
   4.      Depreciation by the number of units produced
   Definition
   Where depreciation is calculated by expressing the useful life of an asset in terms of its expected total output and allocating the annual charge to depreciation based on actual output.
   Formula: Depreciation by number of units produced
   

   

   Depreciation by number of units produced

   
   
   
   5.      Note that there are 12+ methods but all of them are not discussed here.
   Declining Balance Depreciation Method
   ·  Straight-line Depreciation. ...
   ·  Unit-of-Production Depreciation. ...
   ·  Example: ...
   ·  Hours-of-Service Depreciation. ...
   ·  Accelerated Depreciation. ...
   ·  Sum-of-Year Method:
   ·  Double-Declining-Balance Method.
   And so on…
   
   Read Also: DEPRECIATION AND CARRYING AMOUNT