Classic Depreciation
The Classic Depreciation calculation lets you generate depreciation schedules using six classic depreciation methods.
Depreciation is a systematic method of allocating the cost of an asset over its useful lifetime.
The depreciation base is calculated by subtracting the assets salvage or scrap value from its original cost. The assets book value is the difference between the original cost and the accumulated depreciation to date.
Please note that depreciation is a process of allocation, not valuation: an assets book value does not necessarily correspond with its market value. Depreciation is simply an attempt to match an assets cost with its benefits.
Straight line
In the straight line method the depreciation base is evenly allocated over the lifetime of the asset, resulting in equal annual depreciation.
In order to better match the perceived benefits of the asset, other methods allocate more (or less) to the early years:
Fixed percentage
In the fixed percentage method, the annual depreciation for any year is a fixed percentage of the book value at the beginning of the year.
When using this method in
combination with a non-zero salvage value, it is very important to choose an
adequate rate of depreciation.
If the percentage is too low, the ending book value may still be much higher
than the salvage value.
If, on the other hand, the percentage is too high, depreciation will accumulate
so fast that for the last years in the schedule the annual depreciation is zero.
FinKit automatically solves for the optimal depreciation percentage: to use it, simply copy the calculated value into the Fixed depreciation percentage field.
Declining balance
The declining balance method
is a combination of the straight line and the fixed percentage methods. For
this method it is customary to use a declining balance factor.
First of all, a straight line percentage is calculated: for an asset that is
depreciated over five years, this would be 20 %.
Then, depending on the declining balance factor (between 100 % and 200 %), the
fixed percentage is calculated: for a 200 % or a "double declining"
factor, the fixed percentage would be 20 % x 200 % = 40 %.
Declining balance with straight line crossover
Please note that both the fixed percentage and the declining balance methods can never reduce the book value to zero.
To solve this problem, the declining balance with straight line crossover method is used: when the annual depreciation using the declining balance method becomes less than the annual depreciation using the straight line method, a switch is made to the straight line method.
Sum of digits
The sum of digits method is also an accelerated method: the depreciation is expressed as a fraction with the sum of digits from 1 to the number of years as the denominator and the number of years in reverse order as the numerator.
For an asset with a useful lifetime of 3 years:
| Numerator | 1 + 2 + 3 = 6 |
| Year 1 | 3 / 6 |
| Year 2 | 2 / 6 |
| Year 3 | 1 / 6 |
Sinking fund
Except for the straight line method, which produces equal annual depreciation for every year, all the previous methods produce schedules in which more depreciation is allocated to the earlier years.
The sinking fund method allocates more depreciation to the later years.
The depreciation for the first year equals the annual deposit needed for a sinking fund to accumulate at the given rate to an amount that equals the depreciation base.
Then for each consecutive year, the annual depreciation equals the annual sinking fund deposit plus the interest earned on the fund up to that year.
Input
| • depreciation method: | |
| • straight line | |
| • declining balance | |
| • declining balance with straight line crossover | |
| • fixed percentage | |
| • sinking fund | |
| • sum of digits | |
| • asset cost | |
| • useful life in years | |
| • salvage value | |
| Depending on the selected depreciation method: | |
| • declining balance factor | |
| • fixed depreciation percentage | |
| • nominal annual rate | |
Result/Details
| • depreciation schedule |
| • solved depreciation percentage (fixed percentage method) |
Related topic
| MACRS Depreciation |