You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You can also depreciate certain intangible property, such as patents, copyrights, and computer software. Always verify with your accountant what items can be depreciated.
Because companies don't have to account for them entirely in the year the assets are purchased, the immediate cost of ownership is significantly reduced. Not accounting for depreciation can greatly affect a company's profits. Companies can also depreciate long-term assets for both tax and accounting purposes.
Depreciation can be compared with amortization, which accounts for the change in value over time of intangible assets.
You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You can also depreciate certain intangible property, such as patents, copyrights, and computer software.
Types of Depreciation
There are several methods that accountants commonly use to depreciate capital assets and other revenue-generating assets. These are straight-line, declining balance, double-declining balance, sum-of-the-years' digits, and unit of production. We've highlighted some of the basic principles of each below.
1. Straight-Line
Using the straight-line method is the most basic way to record depreciation. It reports an equal depreciation expense each year throughout the entire useful life of the asset until the entire asset is depreciated to its salvage value.
NOTE: At Recurved we use Straight-Line to keep it simple. 😊
2. Declining Balance
The declining balance method is an accelerated depreciation method. This method depreciates the machine at its straight-line depreciation percentage times its remaining depreciable amount each year. Because an asset's carrying value is higher in earlier years, the same percentage causes a larger depreciation expense amount in earlier years, declining each year.
Declining Balance Depreciation = (Net Book Value - Salvage Value) x (1 / Useful Life) x Depreciation Rate
3. Double-Declining Balance (DDB)
The double-declining balance (DDB) method is another accelerated depreciation method. After taking the reciprocal of the useful life of the asset and doubling it, this rate is applied to the depreciable base—its book value—for the remainder of the asset’s expected life. Thus, it is essentially twice as fast as the declining balance method.
4. Sum-of-the-Years' Digits (SYD)
The sum-of-the-years' digits (SYD) method also allows for accelerated depreciation. Start by combining all the digits of the expected life of the asset.
5. Units of Production
This method requires an estimate of the total units an asset will produce over its useful life. Depreciation expense is then calculated per year based on the number of units produced. This method also calculates depreciation expenses based on the depreciable amount.
Source: Investopedia
