Depreciation Method

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BUSINESS 1

DepreciationMethod

Cost allocation on items is based on factors such as time due toabuse or tear. Depreciation refers to the reduction of the value ofitems, which is influenced by the pattern of use, value, and usefullife of the assets (Ibarra, 2013). Some items do not easilydepreciate while others lose value over a short time. Thedepreciation method is used to give assets value based on theirlifetime and usefulness. The paper discusses how depreciation methodchanges and the factors that influence its modification.

Time-factorsmethods, which are mostly used to give assets costs, change withduration.In most cases, productive assets are utilized for a longduration, and their value remains high over time. Technologicaladvancements determine the obsolescence of item (Karabarbounis, &ampNeiman, 2014). Besides, the straight-line method helps to determinedepreciation of an asset. The technique involves associating andspreading the useful life of an item evenly to its fixed cost. Aformula is used when implementing the method to calculate thedepreciation.

Moreover,a method that is known as units-of –production is used to estimatethe units that will be produced by a specific asset over a possibleuseful life. The depreciation of the asset is then based on theexpenses incurred in each period. Furthermore, declining balance isapplied as the accelerated strategy of estimating depreciation(Ibarra, 2013). The method contributes to higher depreciation costsin previous years of possession. Sum-of-years’ digits is also atechnique that calculates depreciation costs by adding asset’suseful life to the total number of years of the asset. The currentyear is considered, in relation to the expected years.

Inconclusion, change in depreciation can be witnessed at any time. Thedepreciation method must be treated in a prospective manner to ensurethat possible changes are identified and accounted for effectively. Amodification in accounting approximation is also trodden followingthe same procedure. Since the time of occurrence of the depreciationchange cannot be evaluated, recording is not allocated any entry.Depreciation for later years and the current year is determined bycomputing and applying the modified method to the outstandingdepreciable aspect of the assets.

References

Ibarra, V. C. (2013). The straight-line depreciation method usedby selected companies and educational institutions in thePhilippines. Journal of Modern Accounting and Auditing, 9(4),480.

Karabarbounis, L., &amp Neiman, B. (2014). Capital depreciationand labor shares around the world: measurement and implications(No. w20606). National Bureau of Economic Research.