I will illustrate the following methods of depreciation: straight-line, units of production, double-declining balance, and sum of the years’ digits. These methods can be used for financial reporting. (The depreciation methods for income tax purposes are not illustrated.)

Let’s assume that a plant asset has a cost of $100,000 with an estimated salvage value of $10,000. This makes the depreciable cost $90,000. The asset has a useful life of 5 years or the production of 100,000 parts. The asset is placed into service on January 1, 2007 and the company’s accounting year is January 1 through December 31.

Straight-line: Depreciable cost of $90,000 divided by 5 years = $18,000 of depreciation each year for 5 years. Download our Straight-line Form and Template.

Units of production: Depreciable cost of $90,000 divided by 100,000 parts = $0.90 per part. In 2007 the company produces 120,000 parts X $0.90 = $108,000 of depreciation. In 2008 the company produces 300,000 parts X $0.90 = $270,000 of depreciation. Continue until accumulated depreciation reaches $90,000. Download our Units of Activity (Production) Form and Template.

Double-declining balance: Straight-line depreciation rate is 20% (100% divided by 5 years). Double the straight-line rate is 40% (20% X 2). This rate is applied to the book value of the asset at the beginning of each year. (Book value is cost minus accumulated depreciation.) For the year 2007 the double-declining balance depreciation is: beginning book value of $100,000 X 40% = $40,000. In 2008 the calculation is: beginning book value of $60,000 X 40% = $24,000. Continue until the accumulated depreciation reaches $90,000. Download our Double Declining Balance Form and Template.

Sum of the years’ digits: Add the digits in the years of useful life: 5+4+3+2+1 = 15. In the first year (2007) multiply 5/15 times the depreciable cost of $90,000 = $30,000 of depreciation. In 2008 multiply 4/15 times $90,000 = $24,000. in 2009 multiply 3/15 times $90,000, and so on. Download our Sum of the Years’ Digits Form and Template.

Learn more about Depreciation.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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