GAAP has four methods for accounting for depreciation on assets: straight-line (SL), units of production (UOP), declining balance (DB), and sum of the year digits (SYD). SL is the most common method and considers the life and cost of the asset. UOP considers the number of production and costs. DB is used for assets that decline in value. SYD considers the years of useful assets. Each method has its own formula for calculating depreciation.
Under generally accepted accounting principles (GAAP), there are four ways to account for depreciation on assets, and each considers different factors. The straight-line (SL) GAAP depreciation method primarily considers the life of the asset and its cost. With the GAAP depreciation method of units of production (UOP), the number of production and costs are the main factors. Declining balance (DB) is used primarily with equipment and assets that are likely to decline in value over the years. In the Sum of the Year Digits (SYD) method, the years of useful assets are the deciding factor.
One of the most common GAAP depreciation methods is the SL method. The accountant must know the depreciable basis of the asset, which is cost less value. This value is divided by the number of years the asset is estimated to live. Unlike most other methods, in which depreciation will be different each year, the SL method has the same depreciation. Assets that have an easily discovered depreciable basis, but do not have a defined life, work best with this method.
While there are many factors considered with the UOP GAAP depreciation method, this method is easy to use once the factors are known. When something is made or used, there are many factors that cause the asset to depreciate. For example, if a product is manufactured, other costs must be considered, including the number manufactured, the cost of exporting or shipping, the pressure on the team, and the human resource hours required to manufacture the product. All of these factors add up, and this leads to the depreciation figure.
A GAAP depreciation method similar to SL is the DB method. To discover the database, the counter must first perform the SL method. The value there is then multiplied by 150, 200, or 250 percent, depending on the estimated depreciation. The depreciation percentage is multiplied by the asset’s initial value to discover its depreciation.
In the SYD GAAP depreciation method, it is important to know exactly how long the asset is going to be useful. Once this is known, the years add up. For example, if the asset will be useful for three years, the accountant will add 1, 2, and 3 to get 6. These numbers are converted to fractions in descending order, which are multiplied by the value of the asset. This means that, for the first year, the asset is multiplied by 3/6, then the following year it is 2/6, and the third year it is multiplied by 1/6.
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