After you decide which depreciation method to use, you must also= decide how often to calculate the depreciation expense and post it to the = general ledger. Calculation and posting can be, for example, monthly = or yearly.

ACS provides three methods to calculate depreciation. These formulas are=
based on Generally Accepted Accounting Procedures (GAAP). However, if thes=
e methods do not meet your organization=E2=80=99s needs, you can create a c=
ustom depreciation method. Here's a description of the three GAAP methods o=
f calculating depreciation along with an example of each.

Depreciation under this method is a function of time rather than use. Th= is method uses a lump sum derived from a mathematical formula based on the = asset=E2=80=99s useful life, historical cost, and salvage value.

The following variables are used:

- Historical Cost (H) =E2=80=94 the original price or value of the fixed = asset at the time of its acquisition
- Salvage Value (S) =E2=80=94 the estimated dollar value an asset still h= olds after its useful life is expired
- Useful Life (U) =E2=80=94 the estimated time, expressed in years, that = a fixed asset holds its value for an organization. After this period, the a= sset is usually retired and sold for its salvage value

Straight Line Depreciation uses the following formula:

**(H - S)/U =3D Accumulated Depreciation**

For example:

You purchased a van for $18,500. You expect the van to =
have a useful life of 15 years and a salvage value of $9,500, and you decid=
e to use the Straight Line Depreciation method.

- Item =E2=80=94 Vehicle
- Historical Cost =E2=80=94 $18,500
- Salvage Value =E2=80=94 $9,500
- Useful Life =E2=80=94 15 years

(18,500 - 9,500)/15 =3D 600

The accumulated depreciation is $600. This means that each year, a depre= ciation of $600 is applied to the asset.

The Double Declining Balance Depreciation method uses a percentage rate = calculated on an asset=E2=80=99s useful life and then the percentage is dou= bled. This percentage is applied to the asset book value at the beginning o= f the year, but only until the amount is applied to the salvage value.

At the end of the asset=E2=80=99s useful life, the book value depreciate= s in the amount necessary to bring the book value to its salvage value. Bec= ause the accumulated depreciation changes each year, the asset book value r= educes each year, causing decreasing depreciation.

The following variables are used:

- Historical Cost (H) =E2=80=94 the original price or value of the fixed = asset at the time of its acquisition.
- Salvage Value (S) =E2=80=94 the estimated dollar value an asset still h= olds after its useful life has expired.
- Useful Life =E2=80=94 the estimated time, expressed in years, that a fi= xed asset holds useful value for an organization. After this period, the as= set is usually retired and sold for its salvage value.
- Accumulated Value (A) =E2=80=94 refers to the total, cumulative amount = of depreciation expense recorded since the fixed asset was acquired. The pu= rpose is to show how much of the total cost of a fixed asset has depreciate= d over time.
- Asset Book Value (C) =E2=80=94 this is the historical cost less the acc= umulated depreciation. (C =3D H - A)

Double Declining Balance Depreciation uses the following formula:

**C * (2/U) =3D Depreciation**

For example:

You purchased a video camera for $850. You expect it to=
have a useful life of 10 years and a salvage value of $200. You decide to =
use the Double Declining Balance Depreciation method.

- Item =E2=80=94 Video Camera
- Historical Cost =E2=80=94 $850
- Salvage Value =E2=80=94 $200
- Useful Life =E2=80=94 10 years

**Year 1**

C =3D 850 - 0

C =3D 850

850 * (2/10)=
=3D 170

The accumulated depreciation for the first year is $170.

**Year 2**

C =3D 850 - 170

C =3D 680

680 * (2/1=
0) =3D 136

The accumulated depreciation for the second year is $136.

As illustrated, the amount to depreciate declines each year. The followi= ng table shows the amount of depreciation for the camera each year:

Year |
Depreciation |
Accumulated Depreciation |
Asset Book Value |
---|---|---|---|

1 |
$170.00 |
$170.00 |
$680.00 |

2 |
$136.00 |
$306.00 |
$544.00 |

3 |
$108.80 |
$414.80 |
$435.20 |

4 |
$87.04 |
$501.84 |
$348.16 |

5 |
$69.63 |
$571.47 |
$278.53 |

6 |
$55.71 |
$627.18 |
$222.82 |

7 |
$22.72* |
$650.00 |
$200.00 |

8 |
$0 |
$650.00 |
$200.00 |

9 |
$0 |
$650.00 |
$200.00 |

10 |
$0 |
$650.00 |
$200.00 |

* The actual amount the formula returns is $44.56. However, this would r= eturn an asset book value of $482.62, which is less than the salvage value = of $200.00. Once the salvage value is reached, the asset is no longer depre= ciated.

This method uses a percentage rate calculated on fractions where the num= erators are based on the number of years of an asset=E2=80=99s useful life,= and the denominators are constants based upon the total sum of all the num= erators added together. Because the denominator remains constant and numera= tor declines each year, the result is a decreasing depreciation expense.

Sum of Year's Digits Depreciation uses these variables:

- Historical Cost (H) =E2=80=94 the original price or value of the fixed = asset at the time of its acquisition.
- Salvage Value (S) =E2=80=94 the estimated dollar value an asset has aft= er its useful life is expired.
- Useful Life =E2=80=94 the estimated time in years that a fixed asset ha= s useful value for an organization. After this period, the asset is usually= retired and sold for its salvage value.
- Age (Y) =E2=80=94 the age of the asset in years.

**Denominator (N) =E2=80=94 [ACS104:(U + 1)/2] * U**

Sum of the Year=E2=80=99s Digits Depreciation uses the following formula= :

**((H - S * (U - Y + 1)) / N =3D Depreciation**

For example:

You buy a new P.A. system for $10,000. You expect it to=
have a useful life of 10 years and a salvage value of $500. You decide to =
use the Sum of the Year=E2=80=99s Digits Depreciation method.

- Item =E2=80=94 P.A. System
- Historical Cost =E2=80=94 $10,000
- Salvage Value =E2=80=94 $500
- Useful Life =E2=80=94 10 years

Denominator =E2=80=94 [(10 + 1)/2) * 10 =3D 55

**Year 1**

((10,000 - 500) * (10 - 1 + 1)) / 55 =3D $17=
27.27

The depreciation for the first year is $1727.27.

**Year 2**

((10,000 - 500) * (10 - 2 + 1)) / 55 =3D 155=
4.55

The depreciation for the second year is $1554.55.

As illustrated, the amount of depreciation declines each year. The follo= wing table shows the amount the P.A. system depreciates each year:

Year |
Depreciation |
Accumulated Depreciation |
Asset Book Value |
---|---|---|---|

1 |
1727.27 |
1727.27 |
$8272.73 |

2 |
$1554.55 |
$3281.82 |
$6718.18 |

3 |
$1381.82 |
$4663.64 |
$5336.36 |

4 |
$1209.09 |
$5872.73 |
$4127.27 |

5 |
$1036.36 |
$6909.09 |
$3090.91 |

6 |
$863.64 |
$7772.73 |
$2227.27 |

7 |
$690.91 |
$8463.64 |
$1536.36 |

8 |
$518.19 |
$8981.83 |
$1018.17 |

9 |
$345.45 |
$9327.28 |
$672.72 |

10 |
$172.73 |
$9500.01* |
$499.99 |

*Totals do not equal salvage value due to rounding. ACS does not allow t= he final asset book value to equal less than the salvage amount.