Depreciation, as per accountancy, is a systematic and rational process of distributing the cost of tangible assets over the life of assets. It is basically a process of allocation.
Therefore, the formula would be,
Cost to be Allocated = Acquisition Cost - Salvage Value
Hence, everything is allocated, over the estimated useful life of assets, and this particular method should be systematic and rational.
Here are a few methods of Depreciation, Based on time
- Straight line method,
- Declining balance method,
- Sum-of-the-years'-digits method
Depreciation based on use is simply the activities involved with it.
The formula for Depreciation is:
|Depreciation = (Cost - Residual value) / Useful Life
Depreciation refers to two such concepts: One is the decline in value of assets (fair value depreciation), and the other one is the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle). All such methods are covered in Homework Help or Assignment Help, in Accounting at transtutors.com.
The former affects values of businesses and entities and the latter affects net income. Generally the cost is allocated, as the expense of depreciation, among the periods in which the asset is expected to be used. Such expense is recognized by businesses for financial reporting and tax purposes. Methods of computing depreciation may vary by asset for the same business. Methods and lives may be specified in accounting and/or tax rules in a country. Several standard methods of computing depreciation expense may be used, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service.
A depreciation expense of 200 per year for 6 years may be recognized for an asset costing 1200.
In terms of economics, depreciation is the gradual and permanent decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question. If capital stock is C0 at the beginning of a period, investment is I and depreciation D, the capital stock at the end of the period, C1, isC0 + I – D
Depreciation expense is calculated utilizing either a straight-line depreciation method or an accelerated depreciation method. The straight-line method calculates depreciation by spreading the cost evenly over the life of the fixed asset. Accelerated depreciation methods such as declining balance and sum of year’s digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset. Get latest updates on the related subject in Homework Help or Assignment Help, in Accounting at transtutors.com.
The required variables for calculating depreciation are the cost and the expected life of the fixed asset. Salvage value may also be considered. Examples of depreciation calculations for both straight line and accelerated methods are provided below.