What Are the Main Types of Depreciation Methods?

[Monirul Islam]

There are several types of depreciation expense and different formulas for determining the book value of an asset. The most common depreciation methods include:

Straight-line
Double declining balance
Units of production
Sum of years digits
Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life. In other words, it is the reduction of value in an asset over time due to usage, wear and tear, obsolescence.  The four main depreciation methods mentioned will be explained in detail below.

#1 Straight-Line Depreciation Method
Straight-line depreciation is a very common and simple method of calculating the expense. In straight-line depreciation, the expense amount is the same every year over the useful life of the asset.

Depreciation Formula for the Straight Line Method:

Depreciation Expense = (Cost – Salvage value) / Useful life

#2 Double Declining Balance Depreciation Method
Compared to other depreciation methods, double-declining-balance results in larger expense in the earlier years as opposed to the later years of an asset's useful life. The method reflects the fact that assets are more productive in its early years than in its later years. With the double-declining-balance method, the depreciation factor is 2x that of a straight line expense method.

Depreciation formula for double declining balance method:

Periodic Depreciation Expense = Beginning book value x Rate of depreciation

#3 Units of Production Depreciation Method
Units-of-production depreciation method depreciates based on the total number of hours used or the total number of units to be produced over its useful life.

The formula for units-of-production method:

Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage value)

#4 Sum-of-the-Years-Digits Depreciation Method
Sum-of-the-years-digits method is one of the accelerated depreciation methods. A higher expense is incurred in the early years while lower expense is incurred in the latter years of the asset.

In sum-of-the-years digits depreciation method, the remaining life of an asset is divided by the sum of the years and then multiplied by the depreciating base to determine the expense.

The depreciation formula for sum-of-the-years-digits method:

Depreciation Expense = (Remaining life / Sum of the years digits) x (Cost – Salvage value)

Source: https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-depreciation-methods/