Talking about depreciation today. Next test pushed back to the 22.
Depreciation is the process by which assets lose value over time due to wearing out or becoming obsolete.
Depreciation does not result in accumulating cash for the replacement of the asset. It just means expensing the value of the asset over its useful life.
Depreciation is acumulated in a contra-asset account. The associated asset does not have its account credited.
There are three primary methods of calculating depreciation
- Straightline Depreciation — (cost – salvage value) / estimated useful life = yearly depreciation — Depreciation accumulates at a steady rate in proportion to estimated life of asset. Straightline depreciation is the most common method of calculating depreciation, because it’s the simplest to calculate.
- Declining Balance — (straight line rate * multiple) * Book Value of Asset at end of previous period — This method assumes things will depreciate rapidly at the beginning of its useful life, and less rapidly the older it become. Most commonly used with tech assets, like computers. Typical declining balance rates are 150% to 250% of straight-line rate.
- Units-of-activity, or Production Units — (cost -salvage value) / measure of usage = depreciation per unit of usage — Used most commonly with vehicles and manufacturing equipment where units of use can be easily calculated