by Heidi Attir

Created on: October 10, 2008   Last Updated: February 16, 2010

Corporations use depreciation as a way to calculate the declining value of a fixed asset. Fixed assets like manufacturing equipment, vehicles and computer equipment lose value over time. There are various methods for determining and calculating depreciation as well as advantages and disadvantages to the various methods.

Straight-line

The straight-line method depreciates a capital asset by the same amount each year over the asset's useful life. The cost minus salvage value is divided by the number of years the asset is expected to remain useful and efficient.

Service Hours

The Service Hours method is the same calculation as the straight-line method except that it uses hours the object has been used instead of a set amount of depreciation for each ear. Because companies have to keep up with the hours of work of an asset, it is much more difficult and less practical to use.

Sum of the Years Digits
The Sum of the Year's Digits method is a way to calculate depreciation where the depreciation rate diminishes as it gets closer to the end of the estimated life of the item. To calculate the rate of depreciation the number of years of the estimated life of the item are added up and placed in the denominator and the numerator is the number of years that are left in the items estimated life. Then the rate of depreciation is multiplied by the wearing value to get the depreciation value.

Double Declining Balance Depreciation

The double declining balance depreciation method is like the straight-line method except that the total percentage of the asset that is depreciated the first year is doubled. That same percentage is used to depreciate the assets value in subsequent years until the value is lower than the straight-line charge, at which point, the straight line will used for the remainder of the asset's life

Units-of-production

The Units of Production method of depreciation uses the number of actual units produced to determine the depreciation allowance. To get the depreciation allowance the depreciation rate is multiplied by the number of items produced. This method works well when factory production is up because when a company produces more they can write off larger amounts as depreciation.

Some companies keep one set of depreciation records for financial accounting and another for preparing their taxes. This is the value of assets and is reflected in a company's profits, so it is important to ascertain the truest value however, because companies are also taxed on their assets, a lower value would result in lower taxable income.

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