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Depreciation Guide - Straight-line Method & Declining-balance Method
By admin | April 1, 2008
Assets with finite lives lose their value over time. Land is the only asset that is not finite. For all other assets, firms depreciate their value, that is, they attribute the historical cost of the asset over its useful life (the number of years that the asset will be used).
At the end of each fiscal year, firms subtract depreciation claimed to that date from the historical cost of the asset, which results in the asset’s current book
There are two common methods used for determining the value of depreciated assets: the straight-line method and the declining balance method. The straight-line method assumes that the asset loses an equal percentage in value during each year of its useful life. The declining balance method assumes that the asset loses more value (depreciates) during the earlier years of the asset’s useful life by assuming the asset loses an equal percentage of its value every year. An example using both methods is shown below for a $10,000 asset that’s expected to be used for 10 years and then salvaged for $1000.
NOTE: For the table of depreciation value, kindly refer to the page here tradingsphere.com/depreciation
From the table it is easy to see that the straight-line method results in the same deduction every year while the declining-balance yields much higher deductions during the earlier years. An implication of the declining-balance method is that the asset can be sold for a higher value before it is due to be salvaged and pose a greater tax gain for the firm.
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Tags: Declining-Balance Method, Depreciation Guide, Straight-Line Method
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