ABC of Accounting – Depreciation Methods

In the weeks ABC of accounting we discuss the merits of the different types of depreciation.

Each company has assets, items purchased for a with a life span of more than one year. This includes not only machines in manufacturing companies, but also office equipment, computers or laptops.  

Depreciation reflects the depreciation of the assets used. It is therefore a matter of assessing the use, technical progress or possible fluctuations in the value of fixed and current assets (such as stocks or shares), for example at the end of the year. The use or better depreciation of the value results in costs or revenues that must be presented in the balance sheet and the income statement. That is why we speak of depreciation ( depreciation = depreciation for wear and tear or ageing of the asset).

In most cases, the straight-line method of depreciation is used. This means that the depreciation amounts remain the same until the end of the use of an asset.  The other method, degresive, allows greater deductions in the earlier years of an asset and is used to minimize taxable income. The following chart shows the effects of different depreciation methods and their evolution.

Below is an illustration showing the value history of an asset and the effect of two different depreciation methods:

Depending on the calculation basis, the depreciation amounts vary in the period of use and thus influence the company result and the value of the assets.