Message-ID: <525530252.49931.1569139719692.JavaMail.WEB996V\$@WEB996V> Subject: Exported From Confluence MIME-Version: 1.0 Content-Type: multipart/related; boundary="----=_Part_49930_2060369510.1569139719692" ------=_Part_49930_2060369510.1569139719692 Content-Type: text/html; charset=UTF-8 Content-Transfer-Encoding: quoted-printable Content-Location: file:///C:/exported.html Selecting a Depreciation Method

# Selecting a Depreciation Method

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.

# Straight L= ine Depreciation

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.

# = Double Declining Balance Depreciation

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.

# Sum of Year=E2=80=99s Digits Depreciation

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.