What Are the Three Types of Depreciation Methods Used by Accountants?

Depreciation plays a major role in all companies. Accountants need to document how much the assets that a company owns have depreciated over time. This means that they must calculate how much of the original purchase price that an item is worth as time passes. In order to have a correct balance sheet and income statement, companies are allowed to use one of three different types of methods to show depreciation. These methods of depreciation include the straight line method. The double declining balance method, and the units of production method. While all three methods take a different approach, they all will give the same result by the time the asset is sold or retired from use.

Straight line depreciation is a very popular method used by a large number of companies. In this method, the same amount of money is depreciated from the asset during each accounting period. The way that this is calculated is by taking the original cost of the item, subtracting the scrap value when it is sold, and then dividing that amount by the number of accounting periods the item will be used. This allows an accountant to depreciate the asset the same amount of money during each accounting cycle.

The double declining balance method is another option that companies can use to calculate their depreciation for assets. Using this method, companies depreciate the item a lot upfront, but less during the end of the assets life. The first step of this method is to calculate the rate of depreciation of the straight line method and then multiplying that number by two. After that is calculated, you have to multiply the rates you just calculated by the original cost of the asset when it was first bought. This is done for every accounting cycle until the item is fully depreciated and retired.

The final method of depreciation used by accountants is the units of production method. This type of depreciation method is calculated by the amount of the asset is used during the accounting cycle. The way this is calculated is by taking the original cost of the item and subtracting the salvage value for it and then dividing that number by the estimated number of the units of production. The item is depreciated until the entire value has been depreciated and then it is retired.

Source:

Spears, Joan. Lecture: Accounting. November 23, 2009