Depreciation Methods
The systematic approaches used to allocate the cost of a long-term asset over its useful life.
What is Depreciation Methods?
Depreciation methods are accounting techniques used to allocate the cost of a tangible long-term asset over its estimated useful life. The method chosen affects the timing of expense recognition and reported profits. The straight-line method spreads cost evenly each year and is the most common under GAAP. The double-declining balance method front-loads depreciation, recording higher charges early in the asset's life. The sum-of-years-digits method also front-loads but less aggressively. Units-of-production ties depreciation to actual output rather than time. For U.S. tax purposes, the Modified Accelerated Cost Recovery System (MACRS) is required, which differs from GAAP depreciation and creates temporary differences that give rise to deferred tax liabilities.
Example
A company buys equipment for $100,000 with a 5-year life and $0 salvage value. Straight-line depreciation yields $20,000/year. Double-declining balance yields $40,000 in Year 1, $24,000 in Year 2, declining each year. The choice of method does not affect total depreciation over the asset's life—only its timing.