Understanding Depreciation Methods
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ScribdTranslationsUnderstanding Depreciation Methods
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ScribdTranslationsDepreciation methods
ARNOLDO JOSÉ GUERRA CABANA
Accounting Processes
Infotep
2021
Depreciation methods are the different ways that exist to measure
the reduction in value that tangible assets experience over time
time, known as depreciation. This system also serves to
organizations, when investing in tangible assets, should calculate the
recovery of your investment.
For this, there are depreciation systems, in which it is calculated
its loss of value during its useful life due to aging,
obsolescence or wear. It is important to highlight that depreciation
it not only serves as a way to calculate the loss of value of assets
materials.
Depreciation also entails a tax deduction for the
companies. Therefore, it is a very detailed process that is closely scrutinized in the
organizations.
To calculate the depreciation of assets, there are different methods: straight line
straight, of the sum of digits, of decreasing balances or data reduction,
and of the production units.
DEPRECIATION METHODS AND EXAMPLES
1. Straight line method.
To calculate it, you only need to divide the original value of the asset by
depreciate over their useful life.
ó =
ú
Therefore, to calculate it, the first thing to do is to calculate the
useful life of the asset that will be depreciated.
1.1 Useful life of fixed assets
By law, real estate is usually assigned a useful life of 20 years.
10 years for furniture and machinery assets and some transportation
(trains, planes, and boats), and 5 years for vehicles and computer equipment.
In addition to the lifespan, another piece of information called the
salvage or residual value of the assets. This value is what is calculated
what the asset will have once its useful life is over; that is, how much money
it can be obtained from it. This value is not mandatory in the calculation.
Once we know the useful life and residual value of the asset in
In this regard, depreciation can be calculated.
1.2 Example 1
We purchased a vehicle for a value of $50,000,000 (fifty million)
of pesos). Its useful life, as established by law, is 5 years.
Calculate your annual depreciation.
With the formula
ó =
ú
50,000,000
ó = 10,000,000
5
Its depreciation will be $10,000,000 each year.
If we want to know the monthly depreciation, we divide the value of the vehicle
for the 60 months corresponding to the 5 years.
50,000,000
ó = 833,333.33
60
We have a monthly depreciation of $833,333.33.
Therefore, with the linear method, the depreciation would be completely
equal; that is, the same for all periods, whether days or months
or years of the asset's useful life.
If the vehicle has a salvage value, it is deducted from the asset value.
and the difference is what depreciates.
1.3 Example 2.
Let's suppose that our vehicle has a salvage value of 20%,
calculate the annual and monthly depreciation of the vehicle.
We start by calculating what the salvage value of our
vehicle, we calculated this value by multiplying the value of the vehicle by
20%
Salvamento = 50,000,000 * 0.20 = 10,000,000
Our rescue is valued at $10,000,000. Now with the value
Remaining, $40,000,000, we perform the depreciation calculation.
40,000,000
ó = 8,000,000
5
We will have an annual depreciation of $8,000,000.
40,000,000
ó = 666,666.67
60
We will have a monthly depreciation of $666,666.67.
2. Method of summing the digits of the year.
This is an accelerated system that increases the annual depreciation rate.
during the initial years of use, then decrease as they go
as the years go by. For this, the following formula is applied:
ú
ó = ∗
To calculate it, the value of the sum of the digits is needed, which is calculated from
the following form:
V(V + 1)
=
2
=
2.1 Example 3
Let's suppose we buy a computer for a value of $3,000,000,
its useful life is 5 years, calculate the depreciation by the sum method
digits.
We start by calculating the sum of digits.
V(V + 1)
=
2
5(5 + 1)
= = 15
2
In this way, the formula for calculating depreciation would be:
ú
ó = * 3,000,000
15
For the first year, the depreciation would be:
5
ó 3,000,000
= = 1,000,000
15
In the first year, the depreciation would be $1,000,000, but for the second
year:
4
ó ∗ 3,000,000
= = 800,000
15
For the second year, the depreciation would be $800,000.
We would do the same with the rest of the years, which are having a
decreasing depreciation.
All results are displayed in the following box:
Año Factor Porcentaje Valor Quota Depreciation Net worth in
active depreciation accumulated books
1 0.333 33.33% 3,000,000 1,000,000 $ 1.000.000 $ 2.000.000
2 0.267 26.67% 3,000,000 $ 800.000 $1,800,000 $ 1.200.000
3 0,200 20.00% 3,000,000 $ 600.000 $ 2.400.000 $ 600.000
4 0.133 13.33% 3,000,000 $ 400.000 $ 2.800.000 $ 200.000
5 0.067 6.67% 3,000,000 $ 200.000 $ 3.000.000 $0
3. Data reduction method
This method also seeks a rapid depreciation. To implement it
It is necessary to have the residual value of the asset in question. The formula is the
next
1
ó = ( )
Where =
3.1 Example 4.
We have our vehicle from example 2, which is valued at $50,000,000 and
it has a saving of 20%, that is, $10,000,000, and its useful life is 5
years, the formula would look like this.
1
10,000,000 5
ó = ( ) 0.27522
50,000,000
The depreciation rate would be 0.27522
= 50.000.000 ∗ 0.27522 = 13.761.016,82
Our depreciation in the first year would be $13,761,016.82.
For the second year, we calculated the new value of the vehicle, which would be
ℎ = 50.000.000 − 13.761.016,82 = 36.238.983,18
The value of my vehicle after depreciation will be $36,238,983.18
The depreciation in the second year will be:
= 36.238.983,18 ∗ 0.27522 = [Link]
This leaves us with a vehicle value of $26,265,278.04
We continue calculating in the same way until we obtain the final result.
of depreciation.
Depreciation by balance reduction
Year Rate Value without Quota Depreciation Net worth in
… depreciation depreciate depreciation accumulated books
1 0.27522 $50,000,000.00 $ 13.761.016,82 $ 13.761.016,82 $36,238,983.18
2 0.27522 $36,238,983.18 $9,973,705.14 $ 23.734.721,96 $ 26.265.278,04
3 0.27522 $ 26.265.278,04 $ 7.228.738,66 $ 30.963.460,61 $ 19.036.539,39
4 0.27522 $19,036,539.39 $ 5.239.242,77 $36,202,703.39 $ 13.797.296,61
5 0.27522 $13,797,296.61 $ 3.797.296,61 $ 40.000.000,00 $ 10.000.000,00
4. Production units method.
This method, like the straight line one, performs a distribution
equal depreciation over the useful life each year.
As its name indicates, it takes into account the units produced by the
active, with what is a suitable system for calculating depreciation of
machinery or equipment that produces units.
To calculate it, first, you need to divide the value of the asset by the
number of units produced over its total useful life.
Once this is done, in each period, the number must be multiplied by
units of that period by the corresponding depreciation of each
unity.
4.1 EXAMPLE 5
We have a shoe manufacturing machine with a value of
$100,000,000, which produces 2,000,000 units over its entire useful life.
ó =
100,000,000
ó = 50
2.000.000
The machine will depreciate $50 for each unit produced.
We know that in the first year there was a production of 1000 pairs of
shoes, how much will the depreciation of the machine be.
We know that 1000 pairs are 2000 units of shoes. So if by
each unit depreciates by a value of $50, the value of the depreciation per year
series of:
Depreciation for the year = 2000 * 50 = 100,000
The first year depreciates $100,000. and so on we calculate the
annual depreciation until the end of its useful life.