Methods of depreciation summary
Depreciation is defined as the reduction in value of a non-current asset over its useful life.
Useful life is the number of years that a non-current asset is expected to be used for.
Depreciation can be calculated using the following methods:
a) Straight-line method
Cost of asset−Residual value
Formula=
Useful life
E.g. if the cost of an asset is $200 000, residual value is $20 000 and the useful life is 10
years. Depreciation will be calculated as:
200 000−20 000
= $18 000
10
b) Reducing balance method
Formula = Depreciation rate x [Cost –accumulated depreciation]
E.g. if the cost of an asset is $400 000 and the depreciation rate is 25%. Depreciation for year
1 and year will be calculated as:
Year 1 = $400 000 x 0.25 = $100 000
Year 2 = [$400 000 - $100 000] x 0.25 = $75 000
c) Sum of digits
Let’s assume that the useful of office furniture is 5 years and its cost is $25 000
The sum of digits will be: 1+2+3+4+5= 15
The depreciation for the Year 1= 5/15 x $25 000= $8 333
Depreciation is defined as the reduction in value of a non-current asset over its useful life.
Useful life is the number of years that a non-current asset is expected to be used for.
Depreciation can be calculated using the following methods:
a) Straight-line method
Cost of asset−Residual value
Formula=
Useful life
E.g. if the cost of an asset is $200 000, residual value is $20 000 and the useful life is 10
years. Depreciation will be calculated as:
200 000−20 000
= $18 000
10
b) Reducing balance method
Formula = Depreciation rate x [Cost –accumulated depreciation]
E.g. if the cost of an asset is $400 000 and the depreciation rate is 25%. Depreciation for year
1 and year will be calculated as:
Year 1 = $400 000 x 0.25 = $100 000
Year 2 = [$400 000 - $100 000] x 0.25 = $75 000
c) Sum of digits
Let’s assume that the useful of office furniture is 5 years and its cost is $25 000
The sum of digits will be: 1+2+3+4+5= 15
The depreciation for the Year 1= 5/15 x $25 000= $8 333
