DEPRECIATION METHODS: Straight-Line, DDB, Units of Production
- Graziano Stefanelli
- 2 days ago
- 2 min read
Depreciation spreads the cost of a fixed asset over its useful life. Different methods affect the timing of expense recognition and the asset’s carrying value on the balance sheet.
1. What Is Depreciation?
Depreciation is the systematic allocation of a tangible asset’s cost over its useful life. It reflects wear and tear, obsolescence, or usage.
Depreciation applies to fixed assets like:
Buildings
Machinery
Equipment
Vehicles
Land is not depreciated.
2. Key Depreciation Concepts
Before applying a method, determine:
Asset cost
Salvage value (residual value at end of life)
Useful life (in years or units)
Depreciation method
Book value = Cost – Accumulated Depreciation
3. Straight-Line (SL) Method
Depreciation is spread evenly across the asset’s useful life.
Formula:(Cost – Salvage value) ÷ Useful life
Example:Asset cost = $10,000
Salvage value = $1,000
Useful life = 5 years
Annual depreciation = ($10,000 – $1,000) ÷ 5 = $1,800
4. Double Declining Balance (DDB) Method
Accelerated method — higher expense in early years.
Formula:
Book value × (2 ÷ Useful life)
No depreciation once book value reaches salvage value.
Example:
Asset cost = $10,000
Useful life = 5 years
Year 1: $10,000 × 40% = $4,000
Year 2: ($10,000 – $4,000) × 40% = $2,400
And so on…
5. Units of Production Method
Depreciation based on usage (miles, hours, units produced).
Formula:
[(Cost – Salvage) ÷ Total estimated units] × Units this period
Example:
Cost = $50,000
Salvage = $5,000
Total expected usage = 100,000 miles
Year 1 usage = 25,000 miles
Depreciation = ($50,000 – $5,000) ÷ 100,000 × 25,000 = $11,250
6. Comparison of Methods
Method | Expense Pattern | Best For |
Straight-Line | Even | Administrative assets |
Double Declining | Front-loaded | Tech, vehicles (lose value fast) |
Units of Production | Variable (based on use) | Manufacturing, heavy equipment |
7. Journal Entry for Depreciation
debit Depreciation Expense
credit Accumulated Depreciation
Example (Straight-line):
debit Depreciation Expense ......................... 1,800
credit Accumulated Depreciation ................ 1,800
8. Disclosures
Required disclosures include:
Method used per asset class
Useful lives or rates
Gross carrying amount and accumulated depreciation
Changes in estimates or method
Key take-aways
Depreciation allocates cost of assets over their useful lives.
Method choice affects timing of expense and asset value.
Straight-line is simplest; DDB accelerates; units-based matches usage.
Transparent disclosures support comparability and audit compliance.
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