- 2069 Bhadra · 4 marks
Define depreciation; list methods
Short answer
Depreciation is the decrease in asset value due to wear, use, and obsolescence, allocated over useful life. Important methods: straight-line, declining balance (including double declining), sum of years’ digits, sinking fund, units of production, MACRS, and depletion.
Define depreciation and list out important methods of calculating depreciation deductions.
Depreciation is the decrease in the value of a physical asset with the passage of time and use, caused by wear, deterioration and obsolescence. In accounting it is the systematic allocation of the cost of the asset (less salvage value) over its useful life, and it is a non-cash expense that is deductible from taxable income.
Important methods of calculating depreciation
| Method | Annual depreciation | Nature |
|---|---|---|
| Straight line | (P − S)/N | equal each year |
| Declining balance (and double declining balance, rate 2/N) | R × opening book value | accelerated |
| Sum of years' digits | (P − S)(N − k + 1)/[N(N + 1)/2] | accelerated |
| Sinking fund | (P − S)(A/F,i,N)(F/P,i,k − 1) | small early, large later |
| Unit of production (service output) | (P − S) × units this year / total units | based on use |
| MACRS | cost basis × table percentage | accelerated tax method |
| Depletion (cost or percentage) | for mines, wells and quarries | based on extraction |
Here P is the first cost, S the salvage value, N the useful life, k the year number and i the interest rate.
✓ Answer checked by Claude Opus 5.5 (high effort)
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