Depreciation Methods
Straight-line
Straight-line depreciation is a very common, and the simplest, method of calculating depreciation expense. In straight-line depreciation, the expense amount is the same every year over the useful life of the asset.
Double-declining balance
The double-declining-balance depreciation results in a larger amount expensed in the earlier years as opposed to the later years of an asset’s useful life. The method reflects the fact that these kinds of assets are typically more productive in their early years than in their later years – also, the practical fact that any asset (think of buying a car) loses more of its value in the first few years of its use. With the double-declining-balance method, the depreciation factor is 2x that of the straight-line expense method in the first years. Once the asset has reached its half life, the straight line method is used until the end of life of the asset.
Depreciation Conventions
Full Year
Full Year will calculate an entire year’s depreciation for the first year, REGARDLESS of the month it was placed in service. During the first year, the annual depreciation will be distributed over the number of months (periods) it is in service for the first year. Example: If the asset is placed in service in the third period, then the first year’s depreciation will be evenly distributed between periods three and twelve. After the first year, the asset will depreciate in the same manner as Full Month.
Half Year
One half of a normal year’s depreciation will be depreciated in the first year. The actual amount of depreciation will be distributed over the number of periods the asset is in service during the first year. Beginning with the second year, a full years’ depreciation is taken, until the last year when an additional half year’s depreciation is taken.
Zero Year
With this convention, the asset accumulates no depreciation in the first year. In the first period of the asset’s second year, it will start depreciating in the same manner as Full Month.
Full Month
An asset has an equal depreciation amount every month, starting with the first month in service and continuing throughout its useful life.
Mid Month
Mid-month charges a full month’s worth of depreciation in the asset’s first month of life if the date in service is before the 16th. If the date in service is after the 15th, then 0 is charged in the first month of life and an ‘extra’ month is added to the asset’s useful life to charge the amount not charged in the first month of life.
Zero Month
The asset will not depreciate in its first month in service. Starting with the second, it will depreciate equally over its useful life in the same manner as Full Month.