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WHAT IS DEPRECIATION?

November 17, 2022

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The definition of an Accumulated Depreciation is the total depreciation for a fixed asset that has been charged to expense since that asset was acquired and made available for use. The intent behind doing so is to approximately match the revenue or other benefits generated by the asset to its cost over its useful life.

There are 5 types of depreciation:

  1. Straight line it reports an equal depreciation expense each year throughout the entire useful life of the asset until the entire asset is depreciated to its salvage value.
  2. Declining balance is a method where assets are depreciated at a higher rate in the initial years than in the subsequent years. Under this method, a constant depreciation rate is applied to an asset’s (declining) book value each year.
  3. Double-declining balance this method is an approach to accounting that involves depreciating certain assets at twice the rate outlined under straight-line depreciation. This results in depreciation being the highest in the first year of ownership and declining over time.
  4. Sum of the Years’ Digits, under the SYD method, the depreciation rate percentage for each year is calculated as the number of years in remaining asset life for the same year divided by the sum of remaining asset life every year through the asset’s life.
  5. Units of Production is method that requires an estimate of the total units an asset will produce over its useful life. Depreciation expense is then calculated per year based on the number of units produced.

Other than that, Accumulated Depreciation also known as the total depreciation for a fixed asset that has been charged to expense since that asset was acquired and made available for use. The accumulated depreciation appears on the balance sheet as a reduction from the gross amount of fixed assets reported.  It might be list in several accumulated depreciation accounts, one for each fixed asset type.

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