What are the Methods of Calculating Depreciation?

Companies can use several different methods to calculate depreciation on Fixed Assets. The method is chosen at the time the asset is purchased and placed in service. The method generally remains the same over the life of an asset.

The common methods used are:

  1. Straight Line Depreciation
  2. Declining Balance Depreciation
  3. Units of Activity (or Production) Depreciation
  4. Sum of the Years Digits Depreciation
  5. MACRS Depreciation (used on tax returns)
  6. Section 179 Depreciation (used on tax returns)

Straight Line Depreciation spreads the cost recovery of an asset evenly across the class life of an asset. Declining Balance, Sum of the Years Digits, MACRS, and Section 179 are accelerated depreciation methods. Higher amounts of depreciation are taken in the early years of class life with decreasing amounts as the asset ages. Units of Activity or Units of Production matches the actual use of the asset (in miles, hours, output) to determine depreciation.

To learn about how to calculate depreciation using common depreciation methods, check out these articles:

For information about how to do an adjusting journal entry for depreciation, check out this article:

For more information about depreciation and accumulated depreciation, check out this Accounting Student Guide:

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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