Machinery's Handbook, 31st Edition
Depreciation
149
Depreciation Depreciation is an accounting method that allocates the cost of an asset over its useful life. A machine may decline in value because it is wearing out and no longer performing its function as well as when it was new. As an economics technique, depreciation spreads the purchase price of an asset or other property over a number of years. Tax regulations do not allow the cost of an asset to be treated as a deductible expense in the year of purchase; rather, a portion of the expense is allocated to each year of the asset’s depreciation period. This yearly allocation is referred to as depreciation . Straight Line Depreciation.— Straight line depreciation is a constant depreciation charge over the period of life. If P is principal value, L is salvage value and n is period of life, then depreciation is calculated:
Depreciated value of an asset at year n :
A = P (1 – x ) + L
P L – n = -------
Depreciation at x th year:
D x
P L – ( ) n x – ( ) n ----------------- L + = ATDR TR P L – n ------- =
Book value after x years:
BV x
n – 1 i 1 i + ( ) n --------------
1 i + ( )
After tax depreciation recovery:
Sum of the Years Digits.— Another method for allocating the cost of an asset minus its salvage value over useful life is sum of the years digits depreciation . This method results in charges that are greater than straight line depreciation charges during the early years of an asset and smaller charges near the end period.
2 P L – ( ) n x – +1 ( ) n n +1 ( ) = ------------------------
Depreciation at x th year:
D x
x n n +1 ( ) ----------
BV x P P L – ( ) 2 n x – +1 ( ) = –
Book value after x years:
Double Declining Balance Method.— A constant depreciation is applied to the book value of a property.
– 1 ( )
P n -- n – 2 n ------
x
Depreciation at x th year:
D x 2 =
– 2 n ------
x
Book value after x years: = Statutory Depreciation System.— A depreciation method used for income tax purposes is accelerated cost recovery system (ACRS) depreciation. The first step in ACRS is to determine the property class of the asset being depreciated. All personal property falls into one of six classes. Reading across Table 3 after identifying the correct property class, principal P for year x is substituted into the following formula: Depreciation at x th year: D x P Depreciation Factor × = BV x P n
Copyright 2020, Industrial Press, Inc.
ebooks.industrialpress.com
Made with FlippingBook - Share PDF online