Question

Describe the two basic methods of depreciation.

Answer 1

1. Straight‑Line Method (SLM):
   • Definition: Spreads the depreciable amount (acquisition cost minus salvage value) equally over the asset’s useful life so the same expense is recorded each period.
   • Formula: Annual depreciation = (Acquisition cost − Salvage value) ÷ Useful life (years).
   • Features: simple, constant expense each year, used when asset’s benefit is uniform.
   • Excel: use the SLN function to compute straight‑line depreciation.
2. Written‑Down Value/Declining‑Balance Method (WDV or DB)
   • Definition: Charges depreciation as a fixed percentage of the asset’s book (carrying) value each period, so expense is higher in early years and declines over time (accelerated depreciation).
   • Calculation concept: Depreciation for a period = Beginning book value × depreciation rate (or use a built‑in function that accounts for salvage, life and period). Because the base falls each year, expense decreases.
   • Features: matches assets that lose value faster early on; often used for tax or matching purposes.
   • Excel: use the DB (declining‑balance) function to compute WDV depreciation.