TABLE OF CONTENTS There are numerous approaches to the calculation of depreciation, and this is a classic example when reference to the accounting policies of the company can provide some useful pointers.
Straight line is undoubtedly the common method of depreciation, but there are several other methods which are described as accelerating depreciation because they generate a higher charge in the early years on an asset's life. Such methods tend to be used for assets such as motor vehicles, which are known to fall dramatically in value from the moment they are driven from the showroom.
Some of the most frequently used methods of accelerated depreciation are
The reducing balance method
Sum of digits
Double declining balance (principally used in USA).
As a reviewer we can leave the details of the calculations to the accounting professionals whilst we concentrate on the impact they have on the reported figures, and why management might select a particular approach.
The following table shows the impact of straight line and accelerated methods in the first year following the acquisition of the asset.
In the early years accelerated methods are more prudent and reduce profits.
If profits are...
