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Question

What are the different method of charging depriciations in the firm?

Answer 1

Straight-line depreciation
The simplest and most often used technique, in which the company estimates the "salvage value" of the asset after the length of time over which it will be used to generate revenues (useful life), and will recognize a portion of that original cost in equal increments over that amount of time. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero.

Sinking fund method
the depreciation expense is an amount of an Annuity so that the amount of the annuity at the end of the useful life would equal the Acquisition Cost of the asset. Theoretically, the depreciation charge should include interest on accumulated depreciation at the beginning of the period.

Declining-balance depreciation
A type of accelerated depreciation because it recognizes a higher depreciation cost earlier in an asset's lifetime. This may be a more realistic reflection of an asset's actual resale value, as well as the expected benefit from the use of the asset: many assets are most useful when they are new. In the U.S., a form of declining-balance depreciation, MACRS, is used for tax purposes and is based on time.


Activity depreciation methods
Not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine.

Sum of Years Digits
A historical depreciation method that results in a more accelerated write off than straight line, but less than declining balance or later methods. Salvage value is counted in the method. There are no property classes of later methods.

Units of Production depreciation
Used in the U.S. in cases where MACRS is inappropriate, and the value to depreciate is based in the asset, such as a mine or natural resources. The method calculates the depreciation based on the units of the asset place in service as compared to the total units of the asset.

Units of Time Depreciation
Similar to units of production, and is used for depreciation equipment used in mine or natural resource exploration, or cases where the amount the asset is used is not linear year to year.