Depreciation is the allotment of the cost of a works plus to write off over its utile ( service ) life in a rational and systematic mode ” ( Weygandt, Kieso and Kimmel, 2003:416 ) . There are three factors affect the computation of depreciation, which are plus cost, utile life and salvage value ( Weygandt, Kieso and Kimmel, 2003 ) . Accountant in different companies will utilize assorted methods to calculate the depreciation. There are straight-line method, cut downing balance method ( dual worsening balance, amount of figures, cut downing per centum ) , rente method, and unit of production method ( Mike, Ron and Allister, 1994 ) . And in most companies, particularly in the big corporations, they will utilize the straight-line method, because it is the easiest one to calculate the depreciation. This essay will exemplify some method that normally used in the companies and contract with each method to happen out which one is the most utile. At the beginning, the essay will exemplify the straight-line method, the 2nd 1 is cut downing balance method, the 3rd method is sum of figures, and the last 1 is the unit of production method. Below each method, the essay will give an illustration, which is calculated by me.
Under the straight-line method, the one-year depreciation disbursal is the same over the plus ‘s estimated utile life every twelvemonth. The one-year depreciation disbursal is determined by depreciation cost divided by the utile life of the plus or multiplied by the one-year rate of depreciation ( Weygandt, Kieso and Kimmel, 2003 ) .
Example 1
An plus costs i??11,000, its expected salvage value is i??1,000, its estimated utile life is 5 old ages.
Depreciable cost =i??11,000-i??1,000 =i??10,000
Annual depreciation disbursal =i??10,000/5years=i??2,000
OR
Annual rate of depreciation =100 % ?5years=20 %
Annual depreciation disbursal =i??10,000*20 % =i??2,000
Year 1 Cost i??11,000
Depreciation 2,000
Year 2 Net book value 9,000
Depreciation 2,000
Year 3 Net book value 7,000
Depreciation 2,000
Year 4 Net book value 5,000
Depreciation 2,000
Year 5 Net book value 3,000
Depreciation 2,000
Net book value 1,000
The straight-line method is the simplest manner among all the methods ; it suited for the usage of plus is unvarying during the utile life ; it is popular used by big corporation, such as Campbell Soup, Marriott Corporation and General Mills.
However, the cut downing balance method has a falling depreciation sum every twelvemonth during the utile life of the plus. The altering depreciation is depended on the book value ( cost less accrued depreciation ) . It is calculated to multiply the book value at the beginning of the twelvemonth and the cut downing balance depreciation rate ( Weygandt, Kieso and Kimmel, 2003 ) .
Example 2
An plus costs ( book value at the beginning of twelvemonth ) i??11,000, its expected salvage value is i??1,000, its estimated utile life is 5 old ages.
Reducing balance depreciation rate = 100 % ?5years=20 % * Calculation of i??901.12 ( i??4505.6A-20 % ) is adjusted to i??3505.6 in order to do the book value equal salvage value ( Weygandt, Kieso and Kimmel, 2003 ) .
Sum of figures is another sort of cut downing balance method, which has the closest connexion with utile life and salvage value of the plus. The depreciation cost is multiply depreciation cost ( plus cost less salvage value ) by figures of each twelvemonth ( Mike, Ron and Allister, 1994 ) .
Example 3
An plus costs i??11,000, its expected salvage value is i??1,000, its estimated utile life is 5 old ages
The figures add up is 1+2+3+4+5=15
Depreciation cost =i??11,000-i??1,000=i??10,000
Year 1 Cost i??11,000
Depreciation ( 5/15A-i??10,000 ) 3,333
Year 2 Net book value 7,667
Depreciation ( 4/15A-i??10,000 ) 2,667
Year 3 Net book value 5,000
Depreciation ( 3/15A-i??10,000 ) 2,000
Year 4 Net book value 3,000
Depreciation ( 2/15A-i??10,000 ) 1,333
Year 5 Net book value 1,667
Depreciation ( 1/15A-i??10,000 ) 667
Net book value 1,000
The dual worsening balance method is really similar to the evoking balance method. It merely doubles the cut downing balance depreciation rate and has the same manner to calculate the depreciation. Reducing per centum is a method likewise to Sum of figures. It gives a fix sum of the plus in progress to compose off each twelvemonth. When company use the cut downing balance method, it can unite the depreciation disbursal to the maintaining cost and run the plus ( Mike, Ron and Allister, 1994 ) . The depreciation charges will big in the early old ages and go smaller and smaller subsequently.
Rather than the clip period, the unit of production method write off the plus by showing the sum of units of production. Because it links to the machine ‘s use and end product closely, it is used in extractive corporations popularly ( Mike, Ron and Allister, 1994 ) . This method is used by some big corporation, such as ChevronTexaco Corp. and Boise Cascade Corporation ( Weygandt, Kieso and Kimmel, 2003 ) . The depreciation disbursal in this method is determined by depreciation cost per unit multiply by units of activity during the twelvemonth. The depreciation cost per unit is computed by depreciation cost divide by entire units of activity.
Example 4
Asset costs i??11,000, its expected salvage value is i??1,000. The industry will bring forth 20,000 green goodss in the first twelvemonth, 15,000 green goodss in the 2nd twelvemonth, 30,000 green goodss in the 3rd twelvemonth, 10,000 green goodss in the forth twelvemonth and 25,000 green goodss in the 5th twelvemonth.
Depreciation cost =i??11,000-i??1,000=i??10,000
Depreciation cost per unit=i??10,000?100,000units=i??0.1
To compare the three chief methods, we find that each method will hold the same book value in the last twelvemonth, but the depreciation disbursal is different during the utile life. The straight-line method supports same ; the cut downing balance method is big in the early old ages and decreases in the ulterior old ages, and the unit of production method is fluctuant bases on the unit it produces.
In the SSAP 12, it allows company to make up one’s mind which depreciation method to utilize by them. But the company must see if the method they choose is suited for the companies ‘ plus, and the depreciation allocated is reasonably to the best of their abilitiesA to profit organize the usage of the plus ( Mike, Ron and Allister, 1994:541, paragraph 8 in the explanatory note subdivision of SSAP12 ) . The intent of all the depreciation methods is the return of the money invested in the plus eventually, but different methods have its rate of retrieving ( Robert, Helen and David, 1978 ) . Companies considerate when their money invest will have and the net income.
Obviously, the methods talked above can be divided into two classs. One is based on utile life, which is straight-line method and cut downing balance method. The other one is base on the figure of the production ; it is unit of production method. So which method is utile will foremost depend on the manner it estimate in the depreciation.
Between the consecutive line method and the cut downing balance method. The benefit of the straight-line method is easy to cipher and the depreciation disbursal will non alter every twelvemonth. While the cut downing balance method has a high depreciation in the early old ages, this will salvage the income revenue enhancement during these old ages because depreciation cost cut down the income reported for revenue enhancement intent ( Robert, Helen and David, 1978 ) . For many company, the money is better to have every bit shortly as rapidly. The autumn in the revenue enhancement means there is more money can be used. Besides, Robert, Helen and David ( 1978:313 ) compared the different depreciation methods on a present value discounted from the depreciation disbursal ( see the table blow ) . They assumed that the money will gain 8 % for the company and found the cut downing balance method have more present value than the straight-line method.
As it mentions above, for a concern, if it is based on usage for the depreciation, the most utile depreciation method should be unit of production method. And if the company is based on the utile life for the depreciation, the most utile one may be the cut downing balance method even though the straight-line method is easy to calculate.
