Accounting 02: Depreciation What You Should Know and How to Applied It.

One good thing about depreciation is that it helps you to know the value of your asset or that which you want to buy for the running of your business. Remember in our last post which we talked about operating income, we made mention of depreciation which I why today, we are here to learn about what depreciation is.

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Depreciation

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The moment you buy a motor vehicle for transportation, the value of it will start reducing if you are to resell it back after using it for some years or months it can't be higher than the price at which you bought the motor vehicle. This is where depreciation comes in place.

Having said that, as we talked previously, we said that "Depreciation" is the reduction of the value of an asset over time, that has to do with the wear and tear of the asset. If you are an investor who likes purchasing assets such as buildings, machinery, motor vehicles, and so on, you need the knowledge of depreciation as it is the knowledge that guides and teaches you how to correlate the cost of an asset with its useful lifespan.

With depreciation, you will know how long the asset that you have an interest in buying has been used, the usefulness of the asset, and the kind of revenue that the asset will provide for you over the year. In accounting, depreciation is treated in four different ways which we are going to treat specifically as types of depreciation. Let's dive into them one after another.

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Types or Methods of Depreciation

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As we have introduced earlier, in accounting the methods or types of depreciation are four which are;

• Straight Line Method

• Sum of the year digital method

• Units of Production Method

• Double declining balance methods

The four types of depreciation that we have shared above are the common ways of calculating the depreciation of an asset which we are going to discuss and share their formulas

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Straight Line Method

This is the simplest method of calculating the of an asset all that you have to do if you want to know the value of an asset that you are interested in buying or selling is to apply the formula below in calculating the asset value.

Having said so, this is the formula

Depreciation Expenses = (Cost of the asset - Scrap value of the asset) / The useful life span of the asset.

All that you have to do, if you want to buy second-hand equipment is to know the cost at which the equipment was bought and subtract it from the scrap value, which is how faulty the equipment is, and divide whatever that you have with the useful life of the asset.

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Sum of the year digit method

This is a method of depreciation that calculates how quickly an asset has declined which is faster in calculating declining balance than the straight-line method. The formula for this method is

Depreciation expense = (Remaining life of the asset / Sum of the years' digits) x (Cost of an asset – Scrap value of the asset)

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Units of production depreciation

This method of depreciation is used to calculate how many items an equipment can produce for you over time. The formula for calculating this is.

Depreciation expense = (Number of units produced / Life of asset in units) x (Cost of an asset – Scrap value of asset)

Double declining balance depreciation

This is the method of depreciation that is used to calculate how equipment can be used when the unit of the production method cannot be used.

The formula for calculating this method is

Depreciation expense = 2 x (1/Life of asset) x Book value

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Conclusion

_{We have discussed depreciation and shared about the four types of depreciation that we have. With depreciation, you will be able to know the value that an asset is currently worth.}

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Previous lesson
Operating Income

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