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The Corporate Finance Institute Accounting
Depreciation expense methods:
• Straight-line depreciation
• Declining Balance (Accelerated depreciation)
• Units-of-production
Straight-line depreciation
This is the most commonly used method of depreciation, and is also
the easiest to calculate. This method simply takes an equal depreciation
expense over the useful life of the asset. Periodic Depreciation Expense
= (Fair Value – Residual Value) / Useful life of Asset. For example,
Company A purchases a building for $50,000,000 to be used over 25
years with no residual value. Depreciation expense is $2,000,000, which
is found by dividing $50,000,000 by 25.
Declining Balance
A declining balance depreciation is used when the asset depreciates
faster in earlier years. As the name implies, the depreciation expense
declines over time. To do this, the accountant picks a factor higher than
one. In a straight line depreciation, the depreciation expense is found
by multiplying the fair value with 1 / useful life. In this calculation, the
factor is 1. In a declining balance, the factor can be 1.5, 2 or more. A
2 factor declining balance is known as a double-declining balance.
Periodic Depreciation Expense = Beginning Value of Asset x Factor /
Useful Life.The depreciation expense changers every year, because it
is multiplied with the beginning value of the asset, which decreases
over time due to accumulated depreciation. Note that residual value is
ignored under declining balance.
For example, Company A has a vehicle worth $100,000, with a useful life
of 5 years. They want to depreciate with the double-declining balance.
In the first year, depreciation is expense is $40,000 ($100,000 x 2 / 5). In
the next year, depreciation expense is $24,000 ( ($100,000 – $40,000) *
2 / 5).
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