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DIFFERENT METHODS OF DEPRECIATION USED BY THE VALUERS

DIFFERENT METHODS OF DEPRECIATION USED BY THE VALUERS

Depreciation is the method of allocating the cost of a long-term asset over its useful life. There are several methods of depreciation, including:

  1. Straight-line depreciation: This is the most common method of depreciation, where the cost of the asset is divided equally over its useful life. The formula for straight-line depreciation is (Cost of asset – Salvage value) / Useful life. This is the most common method of depreciation. It involves dividing the cost of the asset by its useful life to determine the annual depreciation expense. For example, if an asset costs $10,000 and has a useful life of 5 years, the annual depreciation expense would be $2,000 ($10,000/5 years).
  2. Declining balance depreciation: This method assumes that the asset loses its value more rapidly in the earlier years of its useful life, and the depreciation expense is higher in those years. The formula for declining balance depreciation is (Cost of asset – Accumulated depreciation) x Depreciation rate. This method results in a higher depreciation expense in the early years of the asset’s life and lower depreciation expense in the later years. It involves applying a depreciation rate that is twice the straight-line rate to the remaining book value of the asset each year.
  3. Units of production depreciation: This method is based on the actual usage or production of the asset. The depreciation expense is calculated by dividing the total cost of the asset by the total units it can produce, and then multiplying that rate by the actual units produced in a given period. This method is used when the asset’s useful life is measured by how much it produces rather than by time. It involves dividing the cost of the asset by its estimated total production over its useful life to determine the depreciation expense per unit. The depreciation expense for a given year is then calculated by multiplying the depreciation expense per unit by the actual units produced during the year.
  4. Sum-of-the-years’ digits depreciation: This method assumes that the asset depreciates faster in the earlier years of its useful life. The formula for this method is (Cost of asset – Salvage value) x Remaining useful life / Sum of the years’ digits. This method also results in a higher depreciation expense in the early years of the asset’s life and lower depreciation expense in the later years. It involves multiplying the remaining useful life of the asset by a fraction that uses the sum of the years of the asset’s useful life as the denominator.

It’s important to note that the choice of depreciation method can have an impact on a company’s financial statements and tax liability. Each of these methods has its advantages and disadvantages, and the method chosen will depend on factors such as the nature of the asset and the accounting policies of the organization.

Therefore, it’s crucial to consult with an accountant or Valuation/financial professional to determine which method is best for your business.



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