Depreciation methods

Depreciation Methods

Today’s tip of the week is about depreciation. My friend Dan had a great post about depreciation last week link is below. Depreciation is gradually writing off the expense of an asset you will use for a long period of time. There are different methods one can use to write off depreciation. You can have different methods when it comes to writing off depreciation for tax or for bookkeeping and financial statements. The first method is called the straight line method. It is the easiest method to calculate. You figure how many years you want to depreciate the asset and then depreciate it for those years at the same rate each year. The next method is called accelerated depreciation. This method is used a lot for tax purposes but can be used for bookkeeping as well. The basic concept is that write off more of the cost at the beginning and less toward the end of the asset use period. The last method is called units of production method. The concept is that you buy a piece of machinery that produces a product you figure out how much it can produce in a lifetime and divide the units of production you use that year by the lifetime usage and you then times that by the original cost of the machine and that is what you write off in that year. The IRS and other financial regulators want to make sure information is uniform so one method of depreciation must be used for the life of the asset. You cannot for example use straight line one year and the next used accelerated. One special mention I would like to make for section 179 depreciation. This is specifically for tax. This rule states that one can write off up to an extra specified amount for tax in the first year. The amount for 2010 was 200,000 total. One may or may not want to take this depending on how much gross income they made.

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