What is Depreciation In Accounting | Types | Calculator 2022

What is Depreciation In Accounting | Types | Calculator 2022:-

Depreciation is a reduction in the value of a tangible fixed asset due to normal usage, wear and tear, new technology, or unfavorable market conditions. Unlike amortization which does not have any sub-types, there are different types of depreciation methods.

Assets such as plant and machinery, furniture, building, vehicle, etc. which are expected to last more than one year, but not for infinity, are subject to such reduction. It is an allocation of the cost of a fixed asset in each accounting period during its expected time of use.

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Methods of Depreciation

There are main methods of Depreciation in Accounting.

  • Straight-line method
  • Diminishing Value Method.
Straight Line Depreciation Method

First, among types of depreciation methods is the straight-line method, also known as the Original cost method, Fixed installment method, and Fixed percentage method.

The simplest, most used, and popular method of charging such a reduction is the straight-line method. An equal amount is allocated in each accounting period.

The rate of reduction is the reciprocal of the estimated useful life of an asset, so, for example, the useful life of an asset is 5 years, the percentage charged will be 1/5 = 20%.

According to the Straight Line Method,

Depreciation Amt = (Cost of an asset − Salvage Value) / Useful life of the asset in years

Example-

Asset cost = 1,000,000

Depreciation Rate = 20%

1st year = 20/100*1,000,000

=>2,00,000

2nd year = 20/100*1,00,000

=>2,00,000

Diminishing Value Method

Second, among types of depreciation methods is the diminishing value method which is also known as the Written down value method, the Reducing installment method and the Fixed percentage on diminishing balance.

According to the diminishing value method, it is charged on reducing balance & a fixed rate. In this case, a written-down value is spread between the useful life of the asset.

The percentage, at which the shrink happens, remains fixed, however, the amount of depreciation goes on diminishing year after year.

According to the Diminishing Value Method,

R = Rate of Depreciation in %

n = Useful life of the asset in years

S = Residual/Scrap value of the asset

c = Cost of asset

Example-

Asset cost = 1,000,000

Rate of reduction = 20% (DVM)

1st year = 20/100*1,000,000

=>2,00,000

2nd year = 20/100*(1,000,000-2,00,000)

=>1,60,000

Double-declining depreciation

This method also called declining balance depreciation, allows you to write off more of an asset’s value right after you purchase it and less as time goes by. This is a good option for businesses that want to recover more of the asset’s value upfront rather than waiting a certain number of years, such as small businesses that have a lot of initial costs and are in need of extra cash.

The double-declining balance method is advantageous in that it can help offset increased maintenance costs as an asset gets older; it can also maximize tax deductions by allowing higher depreciation expenses in the early years.

This method is mostly used in every business, the double-declining depreciation also called declining balance depreciation. This type of depreciation is good for every type of business.

 

 

 

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