Under the generally accepted accounting principles (GAAP), there are four ways of accounting for asset depreciation, and each one considers different factors. The straight-line (SL) GAAP depreciation method mostly considers the asset’s life and its cost. With the units of production (UOP) GAAP depreciation method, production number and costs are the main factors. Declining balance (DB) is mostly used with equipment and assets that will assuredly decline in value over the years. In the sum-of-the-year digits (SYD) method, the useful asset years are the deciding factor.
One of the more common GAAP depreciation methods is the SL method. The accountant must know the asset’s depreciable base, which is the cost minus the value. This value is then divided by the number of years the asset is estimated to live. Unlike most of the other methods, in which the depreciation will be different each year, the SL method has the same depreciation. Assets that have an easily discovered depreciable base, but not a definite life, work best with this method.
While there are a lot of factors considered with the UOP GAAP depreciation method, this method is simple to use once the factors are known. When something is manufactured or used, there are many factors that cause the asset to depreciate. For example, if a product is made, then other costs should be considered, including the number made, the cost of exporting or shipping, the strain on the equipment and human resource hours needed to make the product. All these factors are added up, and this leads to the depreciation figure.
A GAAP depreciation method similar to SL is the DB method. To figure out the DB, the accountant first needs to perform the SL method. Then, the value there is multiplied by 150, 200 or 250 percent, depending on the estimated depreciation. The depreciation percentage then is multiplied by the asset’s initial worth to discover its depreciation.
In the SYD GAAP depreciation method, it is important to know exactly how long the asset is going to be useful. Once this is known, the years are added up. For example, if the asset will be useful for three years, then the accountant will add 1, 2 and 3 to get 6. These numbers are then turned into fractions that go in descending order, which are multiplied by the asset’s value. This means, for the first year, the asset is multiplied by 3/6, then the next year is 2/6 and the third year is multiplied by 1/6.
