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What are the five types of depreciation?
While there are several ways to calculate how an asset loses value, Accounting Services Buffalo standards typically recognize five primary methods for depreciation. Each method is designed to fit a specific type of asset or business strategy.
1. Straight-Line Depreciation
This is the most common and simplest method. It assumes that an asset loses its value at a constant rate every year.
Best for: Assets where the usage is consistent over time, such as office furniture or a basic building.
Calculation: $(Cost - Salvage Value) / Useful Life$
Result: You record the exact same expense amount every year until the asset reaches its salvage value.
2. Double-Declining Balance (DDB)
This is an accelerated depreciation method. It assumes that an asset is much more productive (and loses more value) in its first few years of service.
Best for: Assets that become obsolete quickly or lose market value fast, like computers, smartphones, or vehicles.
Calculation: It applies a depreciation rate that is double the straight-line rate to the remaining book value each year.
Result: Very high expenses in Year 1 and Year 2, which taper off significantly as the asset ages.
3. Units of Production
Unlike methods based on time, this method is based on actual usage.
Best for: Manufacturing machinery or equipment where the lifespan is measured in "output" rather than years.
Calculation: It calculates a "rate per unit." If a machine is expected to produce 1 million widgets, you charge depreciation based on how many widgets were actually made that year.
Result: If the factory is busy, depreciation is high; if the machine sits idle, the depreciation expense is low.
4. Sum-of-the-Years' Digits (SYD)
Another form of accelerated depreciation, though it is slightly less aggressive than Double-Declining Balance.
Best for: Assets that lose a large chunk of their value early on but still remain useful for a long period.
Calculation: You add up the digits of the asset's useful life (e.g., for a 5-year asset: $5+4+3+2+1 = 15$). In year one, you write off $5/15$ of the value; in year two, $4/15$, and so on.
Result: A "stepping stone" expense that decreases in a predictable, scheduled way each year.
5. Modified Accelerated Cost Recovery System (MACRS)
This is the standard for tax reporting in many jurisdictions (especially the U.S.). While businesses use the Bookkeeping and Accounting Services Buffalo for their internal "books," they often use MACRS for their tax returns.
Best for: Tax strategy and legal compliance.
Key Feature: It assigns assets into specific "classes" (3-year, 5-year, 7-year, etc.) and mandates exactly how much can be written off each year.
Result: It often allows businesses to take larger deductions earlier than they would with the straight-line method, helping with cash flow by reducing immediate tax bills.
