What Identify three types of depreciation policy that could be used?

Answer 1

The main three methods uses are

Straight-Line Method

Declining Balance Method

Double Declining Balance Method

The Straight Line Method provides the same amount of depreciation for each year of the fixed assets life.

The Declining Balance Method involves applying the depreciation rate (%) against the depreciated balance of the fixed asset each year for the life of the asset.

The Double Declining Balance Method is similar to Straight-Line Method on steroids. It's also similar to the Declining Balance Method as it too uses the undepreciated balance of the fixed asset each year, however the depreciation rate is double that of Straight-Line.

For example.

If straight-line has a declining balance rate of 15% annually, double declining will be just what it says DOUBLE 30%

Let me give you fast explanation of these three with a short example.

Say you have a $10,000 fixed asset that you want to depreciate fully over the next five years with no salvage (or residual) value.

Straight line method the depreciation would be $2,000 every year for 5 years, this would not change.

Declining Balance however would change, the first year of depreciation would be $3,000. The second year would be based on the depreciated amount of the fixed asset or ($10,000 - $3,000 = $7,000) we then figure the depreciation on $7,000 to get $2,100. This continues until the asset is fully depreciated.

Double Declining uses a combination of both, the first year of depreciation would literally be double what straight line uses making this one $4,000. The next years depreciation is figured by using the balance of the fixed asset or ($10,000 - $4,000 = $6, 000) giving us a depreciation of $2,400. This cycle also continues until the asset is fully depreciated.

Answer 2

Three types of depreciation policies that could be used are straight-line, reducing balance or declining balance, and sum-of-the-years'-digits. The straight-line method spreads the cost of an asset equally over its useful life. The reducing balance method applies a higher depreciation rate to the asset's initial cost, resulting in larger deductions in the earlier years. The sum-of-the-years'-digits method accelerates depreciation by assigning higher depreciation rates to the earlier years and lower rates to the later years.