A method of calculating, allocating and expensing the cost of an asset such that the asset will lose an equal amount of value each year of its useful life is straight-line depreciation.  The annual expense is calculated by subtracting the residual value of a tangible asset from its historical value and then dividing the result by the asset’s estimated useful life.  This method of deprecation simply distributes the cost of an asset equally over its economic life.

How to Calculate the Straight-Line Depreciation of a Tangible Fixed Asset
(Historical Cost − Residual Value)/Estimated Useful Life
   1.   Determine the asset’s historical cost;
   2.   Determine asset’s estimated useful life;
   3.   Determine the asset’s residual value;
   4.   Subtract the asset’s residential value by its historical cost; and
   5.   Divide the result in the previous step by the asset’s estimated useful life.

A depreciation/amortization method that allocates and expenses the cost of an asset in decreasing amounts in each accounting period over the asset’s life is accelerated depreciation, it producing higher depreciation expense and generates greater tax benefits in the asset’s early years.  Two commonly used variations of accelerated depreciation are sum of years’ digits (SYD) and double-declining balance (DDB) methods.  Accelerated depreciation is frequently chosen because of the tax advantage to companies of expensing costs as quickly as possible.

Double Declining Depreciation – Depreciation Schedule (Example)
Year Book Value
Year Start		 Depreciation
Percentage		 Depreciation
Expense		 Accumulated
Depreciation		 Book Value
Year End
2017 $10,000 40.00% $4,000 $4,000 $6,000
2018 $6,000 40.00% $2,400 $6,400 $3,600
2019 $3,600 40.00% $1,440 $7,840 $2,160
2020 $2,160 40.00% $864 $8,704 $1,296
2021 $1,296 40.00% $518 $9,222 $778
Cost: $10,000; RV: 0; Economic Life (Yrs): 5; Placed in Service: 1 Jan 2016

The unit-of-production depreciation method is a depreciation method often used for plant and equipment that computes the depreciation expense of the asset by dividing its projected unit-of-production capacity by the actual number of units produced in the accounting period.  This method may be most appropriate for an asset that is not in continuous use and where there is a high correlation with the number of units the asset produces rather than the number of years in use.

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