Different Methods Of Calculating Accounting Deflation
April 26, 2016
Valuation is one of the most important things done when by an accountant or a finance manager in their day to day job role. The reason why it is said so is that this task needs a very specific skill set and knowledge to understand the market conditions and basically predict the current value of an asset. It is said that in accounting, every asset needs to be revalued or depreciated on a periodic basis in order to get the most accurate financial status of a particular business or activity. As a result many forms of depreciating methods were formed according to the popular financial needs of entities. Therefore this article will give you some insight on a few popular depreciating methods used around the world.
Straight Line Method
This is the simplest way of depreciating assets according to the accounting principles. This method can be used to depreciate any asset as long as it is depreciable and is stated under the fixed assets of an organization. In straight line method the entity will set out an equal sum of money as an expense in their book of accounts in order to signify the usage of the particular asset. For example, if a vehicle is used for distribution by the company, in order to account for its wear and tear, the company will set out a particular amount out of their revenue to compensate its usage. However, this does not involve or consider tax depreciation schedules or government duties & levies, which is why it is known to be the simplest method.
Unit of Production Method
According to this method, each unit produced by the asset will have a specific amount allocated to signify the usage and the wear and tear of the asset to produce one unit. This will enable the business to depreciate its assets accurately only up to its usage rather than overly depreciation schedule Brisbane it or depreciating it lesser than required. For example, if a production machine produces 100 units a year the depreciable amount needs to be multiplied by 100 to get the total depreciation of the machine for that particular year.
Double Declining Balance Method
In this method the usage is signified in a manner where the depreciation is accounted for by half of the time of its useful economic time. In other words, the depreciating duration is only half of the useful economic time whereas it technically should be the entire useful economic time. For example, if a machine has a useful economic time of 10 years, the deprecating duration would last only five years but double the rate during the depreciating time. This method is more concern on time value of money. There are many more methods available when it comes to depreciating assets i.e. by using tax depreciation schedules, sum of digit years method, MACRS method etc. However these three methods are considered to be more popular. Therefore looking at the above discussion it is evident that depreciating is one of the key roles of an accountant as well as a very tedious and important task.