Methods of Depreciation: Meaning, Types, Formulas & Examples
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What Are Methods of Depreciation?
A method of depreciation is the technique used to determine how much depreciation expense should be charged on an asset during each accounting period.
In simple words: A depreciation method is a rule used to distribute the cost of an asset over its useful life. Different methods distribute depreciation differently.
Some methods charge:
The same amount every year
A higher amount in the early years
Depreciation based on actual usage
Depreciation based on machine operating hours
The method selected should generally reflect how the asset's economic benefits are expected to be consumed.
💡 Aishira Explains
Think about two pairs of shoes. You buy one pair for occasional office meetings and another pair for daily running. Both pairs were purchased at the same time, but would they wear out at the same speed? Probably not. The running shoes would experience much greater usage. Business assets work in a similar way. Some assets provide almost equal benefits throughout their useful life, while others lose usefulness much faster during their early years. Therefore, accountants use different depreciation methods to reflect these different patterns.
Why Do Businesses Need Different Methods of Depreciation?
Not every asset loses value at the same rate. Consider these two assets:
Office Furniture = A good-quality office table may remain useful for many years. Its usefulness may decline relatively evenly.
Delivery Vehicle
A delivery vehicle may experience:
Heavy usage
Wear and tear
Higher maintenance requirements
Faster loss of value during its early years
If both assets were depreciated using exactly the same pattern, the financial statements might not reflect their actual consumption. This is why different depreciation methods exist.
💡 Aishira Explains
The basic objective of every depreciation method is the same: Allocate the depreciable amount of an asset over its useful life. What changes is how that allocation takes place.
Why Is Choosing the Right Depreciation Method Important?
Choosing an appropriate depreciation method is important because depreciation directly affects:
Profit
Asset values
Financial statements
Tax calculations where applicable
The reported cost of using assets
A suitable method helps a business present a more realistic picture of how its assets are being consumed.
1. It Helps Measure Profit More Accurately
Depreciation is an expense. Therefore, the amount of depreciation charged affects the business's reported profit. If the depreciation pattern does not reasonably reflect the asset's usage, profit may not be presented appropriately.
2. It Helps Show Assets at Appropriate Accounting Values
Depreciation gradually reduces the carrying amount of an asset in the accounting records. A suitable method helps reflect this reduction systematically.
3. It Matches Expense With Economic Benefits
An asset is purchased because it is expected to provide benefits to the business. Depreciation attempts to allocate the asset's cost over the periods in which those benefits are consumed.
4. It Improves Financial Statement Comparability
Businesses generally apply depreciation methods consistently for similar assets unless there is a valid reason for a change. This makes financial statements easier to compare across accounting periods.
What Factors Affect the Choice of Depreciation Method?
Businesses do not simply choose a depreciation method randomly. Several factors may be considered.
1. Nature of the Asset
Different assets are used differently.
For example:
Furniture may provide relatively consistent benefits.
Vehicles may experience significant wear and tear.
Computers may become technologically outdated quickly.
Manufacturing machines may be used according to production levels.
The method should suit the nature and use of the asset.
2. Pattern of Economic Benefits
Some assets provide almost equal benefits every year. Others provide greater benefits during their early years. The depreciation method should reflect the expected pattern of consumption of economic benefits.
3. Company Policy
Businesses generally establish accounting policies for depreciation and apply them consistently to similar assets.
4. Accounting Standards
Applicable accounting standards influence how depreciation is measured and how the method should reflect the consumption of an asset's economic benefits. If the expected pattern changes significantly, the method may need to be reviewed under the applicable framework.
What Are the Main Methods of Depreciation?
There are several methods of depreciation. Some commonly known methods include:
Straight Line Method (SLM)
Written Down Value Method (WDV)
Units of Production Method
Machine Hour Method
Sum of Years' Digits Method
Double Declining Balance Method
Annuity Method
For beginners and commerce students, the two most important methods are generally:
Straight Line Method
Written Down Value Method
Let's understand them one by one.
1. Straight Line Method (SLM)
The Straight Line Method, commonly abbreviated as SLM, is a depreciation method in which an equal amount of depreciation is charged every year throughout the useful life of the asset, assuming the relevant conditions remain unchanged.
Simple Definition : Straight Line Method is a method of depreciation in which an equal amount of depreciation is charged every accounting year over the useful life of an asset.
💡 Aishira Explains
Imagine an asset has ₹1,00,000 of depreciable cost and a useful life of 5 years. If the cost is allocated equally: ₹1,00,000 ÷ 5 = ₹20,000 per year.
So the business records:
Year 1 → ₹20,000
Year 2 → ₹20,000
Year 3 → ₹20,000
Year 4 → ₹20,000
Year 5 → ₹20,000
The amount remains the same every year. That's why it is called the Straight Line Method.
Why Is It Called the Straight Line Method?
When depreciation remains constant every year, the depreciation pattern is uniform.
For example:
| Year | Depreciation |
|---|---|
| 1 | ₹18,000 |
| 2 | ₹18,000 |
| 3 | ₹18,000 |
| 4 | ₹18,000 |
| 5 | ₹18,000 |
The depreciation amount doesn't increase or decrease. Therefore, the pattern can be represented as a straight line.
Formula for Straight Line Method
The basic formula is: Annual Depreciation = (Cost of Asset − Residual Value) ÷ Useful Life
Let's understand the three important terms.
Cost of Asset
The cost of an asset generally includes the purchase price and directly attributable costs required to bring the asset to the location and condition necessary for use.
Depending on the situation, this may include:
Purchase price
Transportation charges
Installation expenses
Other directly attributable costs
Residual Value
Residual value, also called scrap value, is the estimated amount expected to be recovered from an asset at the end of its useful life. The residual value is deducted before calculating the depreciable amount under the Straight Line Method.
Useful Life
Useful life is the estimated period during which the asset is expected to provide economic benefits to the business.
It may be expressed in:
Years
Months
Production units
Machine hours
For the basic Straight Line Method, useful life is commonly expressed in years.
Straight Line Method Example
Suppose a business purchases a coffee machine for:
Cost = ₹2,00,000
Residual Value = ₹20,000
Useful Life = 10 years
Step 1: Calculate Depreciable Amount
Depreciable Amount: ₹2,00,000 − ₹20,000 = ₹1,80,000
Step 2: Calculate Annual Depreciation
Annual Depreciation: ₹1,80,000 ÷ 10 = ₹18,000 per year
Therefore, the business will charge ₹18,000 depreciation every year, assuming the asset is used for the full year and there are no changes in the relevant assumptions.
💡 Aishira Explains
The important thing to remember is:
Cost − Residual Value = Depreciable Amount
Then: Depreciable Amount ÷ Useful Life = Annual Depreciation
Year-Wise Depreciation Under SLM
Using the same example:
| Year | Opening Book Value | Depreciation | Closing Book Value |
|---|---|---|---|
| 1 | ₹2,00,000 | ₹18,000 | ₹1,82,000 |
| 2 | ₹1,82,000 | ₹18,000 | ₹1,64,000 |
| 3 | ₹1,64,000 | ₹18,000 | ₹1,46,000 |
| 4 | ₹1,46,000 | ₹18,000 | ₹1,28,000 |
| 5 | ₹1,28,000 | ₹18,000 | ₹1,10,000 |
| 6 | ₹1,10,000 | ₹18,000 | ₹92,000 |
| 7 | ₹92,000 | ₹18,000 | ₹74,000 |
| 8 | ₹74,000 | ₹18,000 | ₹56,000 |
| 9 | ₹56,000 | ₹18,000 | ₹38,000 |
| 10 | ₹38,000 | ₹18,000 | ₹20,000 |
Notice something important: Depreciation remains ₹18,000 every year. However, the book value gradually decreases until it reaches the residual value of ₹20,000.
Rate of Depreciation Under SLM
Sometimes depreciation is expressed as a percentage.
The rate can be calculated as: Rate of Depreciation = Annual Depreciation ÷ Cost of Asset × 100
Using the coffee machine example:
Annual Depreciation = ₹18,000
Cost = ₹2,00,000
Rate: ₹18,000 ÷ ₹2,00,000 × 100 = 9% per annum
Therefore, the depreciation rate is 9% per annum based on this calculation.
Advantages of Straight Line Method
1. Simple to Calculate
The calculation is straightforward. This makes SLM particularly easy for:
Students
Small businesses
Accountants
Beginners
2. Equal Depreciation Every Year
The same depreciation amount is charged every year. This creates a stable annual depreciation expense.
3. Easy to Understand
There are no complicated year-to-year calculations.
4. Suitable for Many Assets
SLM may be appropriate for assets that provide relatively consistent benefits over their useful lives, such as:
Furniture
Office fixtures
Certain buildings
Storage racks
Office equipment
Limitations of Straight Line Method
1. It May Not Reflect Actual Usage
Some assets lose value or usefulness more quickly during their early years. SLM continues to charge the same depreciation every year.
2. It Does Not Reflect Increasing Maintenance Costs
As assets become older, maintenance and repair expenses may increase while depreciation remains constant. Therefore, the combined cost of using the asset may not remain stable.
3. It May Not Suit Rapidly Changing Technology
Computers and certain electronic assets can become obsolete quickly. Equal depreciation every year may not always represent their actual pattern of consumption.
Common Beginner Mistakes in SLM
Mistake 1: Forgetting Residual Value
Beginners sometimes divide the entire cost by useful life.
Remember: Depreciable Amount = Cost − Residual Value (when residual value is relevant.)
Mistake 2: Using Book Value Every Year
Under the basic SLM calculation, annual depreciation is based on the depreciable cost, not the reducing book value.
Mistake 3: Expecting Depreciation to Change
Under SLM, the annual depreciation remains constant when the underlying assumptions remain unchanged.
2. Written Down Value Method (WDV)
The Written Down Value Method, also called the Diminishing Balance Method or Reducing Balance Method, calculates depreciation by applying a fixed percentage to the asset's opening book value each year.
Simple Definition : Written Down Value Method is a depreciation method in which a fixed percentage is applied to the asset's opening book value every year, resulting in decreasing depreciation over time.
Unlike SLM, depreciation does not remain equal every year. It generally starts higher and gradually decreases.
💡 Aishira Explains
Imagine an asset costs ₹2,00,000 and the depreciation rate is 20%.
In the first year: 20% of ₹2,00,000 = ₹40,000.
The book value becomes: 2,00,000 − ₹40,000 = ₹1,60,000.
In the second year, we don't calculate 20% of ₹2,00,000 again.
Instead, we calculate: 20% of ₹1,60,000 = ₹32,000. That's the basic idea behind WDV.
Why Is It Called the Written Down Value Method?
After depreciation is deducted, the remaining value of the asset in the accounting records is called its book value or written down value. Since depreciation is calculated on this reduced value every year, the method is called the Written Down Value Method.
Formula for WDV Method
The basic formula is: Annual Depreciation = Opening Book Value × Depreciation Rate
And: Closing Book Value = Opening Book Value − Depreciation
The percentage may remain constant, but the depreciation amount changes because the opening book value changes every year.
WDV Method Example
Suppose a business purchases a delivery scooter for: Cost = ₹2,00,000
Depreciation rate: 20% per year
Let's calculate depreciation year by year.
Year 1
Opening Book Value = ₹2,00,000
Depreciation: ₹2,00,000 × 20% = ₹40,000
Closing Book Value: ₹2,00,000 − ₹40,000 = ₹1,60,000
Year 2
Opening Book Value = ₹1,60,000
Depreciation: ₹1,60,000 × 20% = ₹32,000
Closing Book Value: ₹1,60,000 − ₹32,000 = ₹1,28,000
Notice that the rate is still 20%, but the depreciation amount has decreased.
Complete WDV Depreciation Schedule
| Year | Opening Book Value | Depreciation @ 20% | Closing Book Value |
|---|---|---|---|
| 1 | ₹2,00,000 | ₹40,000 | ₹1,60,000 |
| 2 | ₹1,60,000 | ₹32,000 | ₹1,28,000 |
| 3 | ₹1,28,000 | ₹25,600 | ₹1,02,400 |
| 4 | ₹1,02,400 | ₹20,480 | ₹81,920 |
| 5 | ₹81,920 | ₹16,384 | ₹65,536 |
💡 Aishira Explains
The easiest way to remember WDV is: Same rate + lower book value = lower depreciation amount
The percentage stays the same, but the amount keeps reducing.
Why Is Depreciation Higher in the Early Years Under WDV?
Many assets lose a significant portion of their value or usefulness during their early years. For example, consider a computer.
During its first few years:
It may be used heavily.
Newer technology may appear.
Software requirements may increase.
Its resale value may fall.
Businesses may replace it with newer models.
Therefore, a depreciation method that charges higher depreciation initially may better reflect the expected pattern for certain assets.
Where Is the WDV Method Commonly Used?
WDV may be suitable for assets that experience faster decline in value or usefulness during their early years.
Examples include:
Motor vehicles
Computers
Laptops
Machinery
Manufacturing equipment
Electronic equipment
The exact method used depends on the applicable accounting requirements and the pattern of economic benefits.
Advantages of WDV Method
1. Reflects Faster Initial Decline
WDV charges higher depreciation during the earlier years, which may better reflect assets that lose usefulness rapidly.
2. Suitable for Technological Assets
Computers and electronic equipment can become outdated quickly. WDV can provide a depreciation pattern that reflects this faster early decline.
3. Better Matches Certain Cost Patterns
As assets become older, depreciation decreases while repair and maintenance costs may increase. This can create a more balanced total cost pattern over time.
4. Commonly Used in Practice
WDV is widely encountered in accounting and taxation contexts for particular asset categories, subject to applicable rules.
Limitations of WDV Method
1. Calculations Are Slightly More Complex
Unlike SLM, depreciation must be recalculated every year using the revised book value.
2. Annual Depreciation Is Unequal
The depreciation expense changes from year to year.
3. Book Value May Not Automatically Reach Zero
Because depreciation is calculated on the remaining balance, the mathematical balance may continue to exist unless an appropriate adjustment is made under the applicable rules.
Common Beginner Mistakes in WDV
Mistake 1: Applying the Rate to Original Cost Every Year
This is one of the most common mistakes.
Under WDV: Depreciation = Opening Book Value × Rate
Not: Original Cost × Rate every year.
Mistake 2: Changing the Depreciation Rate Every Year
The depreciation amount changes because the book value changes. The rate remains the same unless the applicable accounting policy or rules require a change.
Mistake 3: Confusing Book Value With Market Value
Written Down Value is an accounting value. It does not necessarily mean that the asset could actually be sold for that amount in the market.
SLM vs WDV: What's the Difference?
This is one of the most important comparisons for commerce students.
| Basis | Straight Line Method | Written Down Value Method |
|---|---|---|
| Meaning | Equal depreciation every year | Depreciation decreases every year |
| Calculation Base | Depreciable cost | Opening book value |
| Annual Depreciation | Constant | Decreasing |
| Rate | Generally expressed as a fixed rate | Fixed percentage applied to opening book value |
| Book Value | Decreases uniformly | Decreases more rapidly in earlier years |
| Calculation | Simple | Slightly more complex |
| Suitable For | Assets providing relatively consistent benefits | Assets losing value/usefulness more rapidly initially |
| Initial Depreciation | Lower compared with accelerated methods | Higher |
| Later Depreciation | Remains the same | Becomes lower |
💡 Aishira Explains
Remember it this way:
SLM → Same depreciation
WDV → Decreasing depreciation
That's the easiest distinction to remember for exams.
SLM vs WDV: Numerical Comparison
Suppose an asset costs ₹2,00,000. Under SLM, assume annual depreciation is ₹18,000. Under WDV, assume the depreciation rate is 20%.
| Year | SLM | WDV |
|---|---|---|
| 1 | ₹18,000 | ₹40,000 |
| 2 | ₹18,000 | ₹32,000 |
| 3 | ₹18,000 | ₹25,600 |
| 4 | ₹18,000 | ₹20,480 |
The difference becomes clear immediately.
Under SLM: Same amount every year.
Under WDV: Higher amount initially, then gradually decreasing.
Which Depreciation Method Is Better?
There is no single depreciation method that is automatically best for every asset. The more useful question is: Which method best reflects how the asset's economic benefits are consumed?
If an asset provides relatively equal benefits throughout its useful life, SLM may be appropriate. If an asset loses value or usefulness more rapidly during its early years, WDV or another suitable accelerated method may better reflect the pattern. The choice should be based on the nature and expected use of the asset and the applicable accounting requirements.
Other Methods of Depreciation
SLM and WDV are the two methods most commonly introduced in basic accounting, but there are other methods as well.
Let's understand them briefly.
1. Units of Production Method
Under this method, depreciation depends on the actual output or production of the asset. If a machine produces more units during a year, depreciation will generally be higher. This method can be useful when the asset's usage can be reliably measured in production units.
Example
Suppose a machine is expected to produce 1,00,000 units during its useful life. If it produces 20,000 units in one year, depreciation is based on those units rather than simply on the passage of time.
2. Machine Hour Method
The Machine Hour Method calculates depreciation based on the number of hours a machine operates. The more hours the machine works, the greater the depreciation charged for that period. This can be useful in manufacturing businesses where machine usage varies significantly from one period to another.
💡 Aishira Explains
Think of it like this: More machine hours → More usage → More depreciation
3. Sum of Years' Digits Method
The Sum of Years' Digits Method is an accelerated depreciation method.
Under this method:
Higher depreciation is charged in the early years.
Lower depreciation is charged in later years.
It can be useful when an asset is expected to provide greater benefits during its earlier years. This method is less common in basic accounting courses but is useful to understand as an example of accelerated depreciation.
4. Double Declining Balance Method
The Double Declining Balance Method is another accelerated depreciation method. It generally applies a depreciation rate that is approximately twice the Straight Line rate to the asset's declining book value, subject to the applicable rules.
Therefore:
Depreciation is higher initially.
Depreciation decreases over time.
This method can be useful for assets that become obsolete rapidly.
5. Annuity Method
The Annuity Method considers not only depreciation but also the interest associated with the capital invested in the asset. Because the calculations are more complex, this method is less commonly encountered in introductory accounting.
Quick Comparison of Depreciation Methods
| Method | Main Basis | Depreciation Pattern |
|---|---|---|
| Straight Line | Time/useful life | Equal |
| Written Down Value | Opening book value | Decreasing |
| Units of Production | Units produced | Based on output |
| Machine Hour | Hours of operation | Based on usage |
| Sum of Years' Digits | Accelerated allocation | Higher initially |
| Double Declining Balance | Declining book value | Higher initially |
| Annuity | Depreciation + interest consideration | More specialised |
Do Different Assets Have to Use the Same Method?
No. Different assets may require different depreciation methods depending on their characteristics and the applicable accounting requirements.
For example:
Furniture may be depreciated using SLM.
Vehicles may use WDV.
Production machinery may be depreciated based on production or machine hours where appropriate.
Certain rapidly obsolete assets may be suited to an accelerated method.
The important point is not to choose a method simply because it produces a preferred profit figure. The method should reasonably reflect the asset's consumption pattern.
How Does Depreciation Affect Profit?
Depreciation is generally recognised as an expense.
Therefore: Higher depreciation expense → Lower accounting profit
And: Lower depreciation expense → Higher accounting profit
Different depreciation methods can therefore produce different depreciation expenses in different years.
For example, during the early years:
SLM may charge ₹18,000.
WDV may charge ₹40,000.
Therefore, assuming all other factors remain the same, WDV would result in a higher depreciation expense and lower accounting profit in that particular year.
Does Depreciation Affect Cash?
This is an important point for beginners. Depreciation itself is a non-cash expense. The business does not pay ₹18,000 or ₹40,000 in cash every year because of depreciation. The cash outflow occurred when the asset was purchased. Depreciation is the accounting allocation of that asset's cost over its useful life.
💡 Aishira Explains
Think of buying a laptop for ₹60,000. You pay ₹60,000 when purchasing the laptop. You don't pay another ₹10,000 in cash every year just because depreciation is recorded. Instead, accounting spreads the cost over the laptop's useful life.
Common Mistakes While Studying Depreciation Methods
Mistake 1: Thinking Every Asset Uses SLM
Not necessarily. Different assets may have different depreciation patterns.
Mistake 2: Confusing SLM and WDV
Remember:
SLM = Equal depreciation
WDV = Decreasing depreciation
Mistake 3: Applying WDV to Original Cost Every Year
Under WDV, depreciation is calculated on the opening book value.
Mistake 4: Forgetting Residual Value in SLM
When residual value is given and relevant: Depreciable Amount = Cost − Residual Value
Mistake 5: Confusing Book Value With Market Value
Book value is an accounting figure. It does not necessarily equal the current market selling price.
Mistake 6: Assuming Higher Depreciation Means Higher Cash Expense
Depreciation is a non-cash accounting expense.
Mistake 7: Choosing a Method Only to Reduce Profit
The method should reflect the asset's consumption pattern and comply with applicable accounting requirements.
Mistake 8: Forgetting That Depreciation Affects Profit
Depreciation is an expense, so it reduces accounting profit.
Methods of Depreciation: Easy Memory Trick
If you're preparing for a Commerce or accounting exam, remember these simple points:
SLM = Same amount every year
WDV = Same percentage, decreasing amount
Units of Production = More production = More depreciation
Machine Hour = More machine hours = More depreciation
Sum of Years' Digits = Higher depreciation initially
Double Declining Balance = Accelerated depreciation
Annuity = Depreciation with interest consideration
Frequently Asked Questions About Methods of Depreciation
1. What are methods of depreciation?
Methods of depreciation are techniques used to allocate the cost of a depreciable asset over its useful life. The commonly studied methods include the Straight Line Method and Written Down Value Method.
2. Why are different methods of depreciation used?
Different assets do not lose their usefulness at the same rate. Different methods help reflect different patterns of asset usage and economic benefit consumption.
3. What is the Straight Line Method?
The Straight Line Method is a method in which an equal amount of depreciation is charged every year over the useful life of an asset, assuming the relevant conditions remain unchanged.
4. What is the formula for SLM?
Annual Depreciation = (Cost of Asset − Residual Value) ÷ Useful Life
5. What is Written Down Value Method?
WDV is a depreciation method in which a fixed percentage is applied to the asset's opening book value every year.
6. Why does depreciation decrease under WDV?
Because the depreciation rate is applied to a reduced book value every year.
7. What is the formula for WDV?
Annual Depreciation = Opening Book Value × Depreciation Rate
8. What is the main difference between SLM and WDV?
Under SLM, depreciation remains equal every year. Under WDV, depreciation generally decreases every year.
9. Which method is easier to calculate?
The Straight Line Method is generally easier because the annual depreciation amount remains constant.
10. Which assets are suitable for SLM?
SLM may be suitable for assets that provide relatively consistent benefits over their useful life, such as furniture, office fixtures, and certain buildings.
11. Which assets are suitable for WDV?
WDV may be suitable for assets such as vehicles, machinery, computers, and electronic equipment that experience greater decline in value or usefulness during their early years.
12. Does the depreciation rate change every year under WDV?
Normally, the percentage remains fixed while the depreciation amount decreases because the opening book value decreases.
13. What is book value?
Book value is the amount at which an asset is carried in the accounting records after considering accumulated depreciation and other relevant adjustments.
14. What is residual value?
Residual value is the estimated amount expected to be recovered from an asset at the end of its useful life.
15. Is residual value considered under SLM?
Yes. Where relevant, residual value is deducted from the asset's cost before calculating depreciable amount under SLM.
16. Does WDV always reduce an asset's value to zero?
Not necessarily. Mathematically, applying a fixed percentage to a declining balance may leave a residual balance unless an appropriate adjustment is made.
17. What is the Units of Production Method?
It is a method in which depreciation is based on the asset's actual production or output.
18. What is the Machine Hour Method?
It calculates depreciation according to the number of hours for which a machine is operated.
19. What is an accelerated depreciation method?
An accelerated depreciation method charges a higher amount of depreciation in the earlier years and a lower amount in later years. WDV, Sum of Years' Digits, and Double Declining Balance are examples of accelerated approaches.
20. Does depreciation affect profit?
Yes. Depreciation is an expense, so it reduces accounting profit.
21. Does depreciation involve a cash payment every year?
No. Depreciation is a non-cash accounting expense. The cash payment generally occurs when the asset is purchased.
22. Can different assets use different depreciation methods?
Yes, depending on the nature of the assets, expected consumption pattern, accounting policies, and applicable accounting requirements.
23. Which depreciation method is the best?
There is no universally best method. The appropriate method is the one that reasonably reflects the pattern in which the asset's economic benefits are consumed, subject to applicable requirements.
24. Why is depreciation important in accounting?
Depreciation helps allocate the cost of assets over their useful lives and affects reported profit and the carrying amount of assets in financial statements.
25. What are the main methods of depreciation?
The main methods include:
Straight Line Method
Written Down Value Method
Units of Production Method
Machine Hour Method
Sum of Years' Digits Method
Double Declining Balance Method
Annuity Method
Key Takeaways 📌
Let's revise the entire topic in a few points:
A depreciation method is a technique used to allocate the cost of an asset over its useful life.
Different assets may lose value or usefulness in different patterns.
The Straight Line Method (SLM) charges an equal amount of depreciation every year.
SLM formula:
Annual Depreciation = (Cost − Residual Value) ÷ Useful Life
The Written Down Value (WDV) Method applies a fixed percentage to the opening book value.
WDV formula:
Annual Depreciation = Opening Book Value × Depreciation Rate
Under SLM, annual depreciation generally remains constant.
Under WDV, annual depreciation generally decreases over time.
SLM may suit assets that provide relatively consistent benefits.
WDV may suit assets that experience greater decline in value or usefulness during their early years.
Other depreciation methods include Units of Production, Machine Hour, Sum of Years' Digits, Double Declining Balance, and Annuity Method.
Depreciation is an expense, so it affects accounting profit.
Depreciation itself is a non-cash expense.
The appropriate depreciation method should reflect the asset's expected pattern of economic benefit consumption and comply with applicable accounting requirements.
What's Next? 🚀
Now that you understand Methods of Depreciation, you know how businesses decide the amount of depreciation to charge on different assets.
You have learned:
What depreciation methods are → Why different methods are needed → SLM → WDV → SLM vs WDV → Other depreciation methods → Common mistakes → Practical examples
But depreciation is only one part of accounting for fixed assets.
In the next chapter, we'll move forward and explore another important accounting concept and continue building your accounting knowledge step by step.
Keep learning, keep practising, and remember: accounting becomes much easier when you understand the logic behind the numbers. ❤️
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