Companies have a pick among the many methods available with which to apportion the cost of fixed assets they have acquired. One of type of these methods is the diminishing charge methods dwelling of sum-of-the-years’-digits and declining-balance method ( author 525 ) . Under these methods. the company allocates a higher part of the cost of the plus in its earlier old ages than in ulterior 1s. Because of the higher cost allotment in the earlier twelvemonth these methods are besides called the accelerated method ( 526 ) . Sum-of-the-years’-digits The name of this method is really descriptive of the expression used to calculate depreciation cost.
As one of the accelerated methods to apportion cost. sum-of-the-years’-digits allocates a higher depreciation cost in the early life of the plus. with the depreciation cost decreasing every twelvemonth ( 527 ) . The first portion of calculating the depreciation cost under this method is to find the depreciable cost of the plus. which is computed by subtracting the salvage value from the acquisition cost. The depreciable cost is multiplied by the rate of the depreciation for the twelvemonth to get at the depreciation cost for the twelvemonth. To calculate for the rate of depreciation for the twelvemonth. the old ages of the estimated life of the plus are added.
This serves as the denominator. To exemplify: an plus with a utile life of three twelvemonth will utilize a denominator of six computed as ( 3+2+1 ) . The numerator is the estimated life of the plus at the beginning of the twelvemonth. To exemplify: the rate of depreciation to be used on the plus above on its 2nd twelvemonth of usage is 2/6 or 1/3. This method of calculating depreciation is characterized by a rate of depreciation that alterations every twelvemonth. At the terminal of the utile life of the plus. the staying balance of the plus will be its salvage value. ( 527 ) Calculating for the amount of the old ages for an plus with a really high estimated life can be time-consuming.
Mathematicians came out with a expression to rush up the procedure. The expression is expressed as: N ( n+1 ) all over 2. with N as the estimated life of the plus. ( 527 ) Declining-balance Method The declining-balance method. on the other manus. uses a changeless rate in calculating the depreciation cost for the twelvemonth. The rate is normally a multiple of the straight-line method. ( 527 ) To exemplify: an plus with an estimated utile life of five old ages is depreciated at the rate of 20 % under the straight-line method and at the rate of 40 % under the declining-balance method.
The rates used by the companies vary from industry to industry and from plus to plus ( 527 ) . Unlike the sum-of-the-years’-digits. the worsening balance method do non subtract the salvage value of the plus when calculating for the depreciation cost. Alternatively. the book value of the plus is multiplied by the rate of depreciation to get at the allocated cost for the twelvemonth. and the procedure is repeated every twelvemonth until such clip that the book value of the plus is equal to the salvage value. The depreciation cost of the plus diminutions every twelvemonth under this method because the book value is decreased every twelvemonth by the depreciation cost. ( 527 )