Depreciation Methods

1. What are at least four depreciation methods that are available to a company?

There is the Activity Method, Straight-line Method, Sum-of-the-Years'-Digits Method and the Declining-Balance Method.

2. What are the similarities and the differences?

The Activity Method, which is also known as the variable charge or units of production method. With this method, we consider the productivity and not the passage of time. The life of the asset is considered by the output and the input. There is however a limitation to this method and does not work when we are talking about depreciation as a function of time and not an activity.

The Straight-line Method considers depreciation a function of time rather than a function of usage. This method is most widely used due to the facts that it is most appropriate and very simple. Although, some companies feel that since the economic usefulness as well as the repair/maintenance expense are the same each year, as well as the rate of return analysis being distorted, that this is not the best method to utilize.

The sum-of-the-years'-digits method results in a decreasing depreciation charge based on the decreasing fraction of depreciable costs. This method utilizes the use of fractions to determine the depreciation. (I found this method to be easy to apply and easy to follow.)

The declining-balance method uses a depreciation rate, in which is a multiple of the straight-line method. This method is the only method that does not deduct the salvage value when calculating the depreciation base, because in this method, we multiply the declining-balance rate by the book value at the start of each period. We continue this until the book value equals the estimate salvage value. Most companies that use this method will switch to the straight-line