Depreciation Methods for Property, Plant, and Equipment (PPE)

This lesson is part 12 of 26 in the course Financial Reporting Part 1

Straight-Line Method

The straight-line method associates the long-lived asset’s usefulness with its age.

Straight-Line Expense = (Cost – Salvage Value)/n

where n = number of years in asset’s useful life

Accelerated Methods of Depreciation

Accelerated methods of depreciation include:

Sum-of-the-Years Digits (SYD) expensing.
Double Declining Balance (DDB) expensing.

SYD Method

SYD method treats an asset as more useful in its early life by raising the depreciation expense for the early years.

SYD Example: If a company’s factory has a new conveyor belt with a useful life of 5 years, then SYD = 1+2+3+4+5 = 15. This conveyor belt cost $100,000 and has a salvage value = $0. The year two depreciation expense under the SYD method for the company will be calculated as follows:

($100,000 – $0) * (5 – 2 +1)/15 = $100,000*(4/15) = $26,667

SYD Depreciation Expense for Year “i” = (Cost – Salvage Value) * ((n – “# of the i^th year” +1))/SYD

DDB Methods

DDB method accelerates the depreciation rate of the straight line method.

DDB Expense = (Cost – Accumulated Depreciation) * (2/n)

Unlike the time based methods of straight line and accelerated depreciation, the Units-of-Production (U-O-P) depreciation method is activity based. A year’s depreciation expense on an annual income statement will include that year’s production as a fraction of total estimated lifetime production from the asset.

U-O-P Expense = ((Cost – Salvage Value)/# of Total Lifetime Units Estimated)* # of Units Produced in the Accounting Period.

Once a company has invested in a long-lived asset, it must:

Choose a depreciation method;
Estimate the useful life of the asset over which the depreciation will take place; and
Determine if the asset will have a salvage value at the end of its depreciable life.