1) Straight-Line Method
2) Declining-Balance Method
3) Double-Declining-Balance Method
4) Sum-of-the-Year's digits Method
What are the main characteristics of each method and in what situation would you use each of these methods?
Here is a site that might help.
http://en.wikipedia.org/wiki/Depreciation
1) Straight-Line Method: The straight-line method is a depreciation method that evenly spreads the cost of an asset over its useful life. The main characteristics of the straight-line method include:
- Equal depreciation expense: The method allocates the same amount of depreciation expense each year, resulting in a consistent reduction in value over time.
- Simple calculation: The annual depreciation expense is calculated by dividing the cost of the asset by its useful life.
This method is typically used when the asset's value declines evenly over time and there are no significant variations in its usage or productivity. It is commonly employed for assets like buildings, office furniture, or vehicles that have a consistent depreciation pattern.
2) Declining-Balance Method: The declining-balance method is a depreciation method that uses a fixed percentage of an asset's book value each year to calculate depreciation expense. The main characteristics of the declining-balance method are:
- Higher depreciation expense in the early years: The method results in higher depreciation expense in the initial years of an asset's life and gradually reduces it over time.
- Accelerated depreciation: This method recognizes more depreciation earlier, reflecting the assumption that assets are more productive and efficient when new.
The declining-balance method is often used for assets that are highly productive in their early years and experience a higher rate of obsolescence, such as technology equipment or machinery.
3) Double-Declining-Balance Method: The double-declining-balance (DDB) method is an accelerated depreciation method that applies a fixed percentage (usually twice the straight-line rate) to the asset's book value each year. The main characteristics of the DDB method are:
- Highest depreciation expense in the first year: This method results in the highest depreciation expense in the first year and gradually reduces it over time.
- Faster write-off: It allows for earlier recognition of depreciation expenses compared to the straight-line or declining-balance methods.
The double-declining-balance method is often used for assets that are expected to be highly productive in their early years but rapidly lose value or become obsolete. It is commonly applied to assets like computer systems or technology devices.
4) Sum-of-the-Year's digits Method: The sum-of-the-year's digits method is an accelerated depreciation method that calculates annual depreciation expense based on a fraction of the sum of the asset's digits, with the most recent year's digit as the numerator and the sum of all years' digits as the denominator. The main characteristics of the sum-of-the-year's digits method include:
- Accelerated depreciation: This method recognizes more depreciation in the early years and less in the later years.
- Complex calculation: The calculation involves summing up the series of digits for the asset's useful life, which can be time-consuming.
The sum-of-the-year's digits method is often used when an asset's utility and productivity decline more rapidly in the early years but slows down over time. It is generally applied to assets like machinery or equipment that experience significant wear and tear in their initial period.
In summary, the choice of depreciation method depends on the nature of the asset, its expected useful life, and the desired pattern of recognition of depreciation expenses over time.