Contents
1. Units of product method
2. Accumulated Depreciation vs. Accelerated Depreciation
3. Accumulated Depreciation vs. Depreciation expenditure
4. Special Considerations
Units of product method
Under the units of product method, a company estimates the total useful affair of an asset. also, the company evaluates how numerous of those units were consumed each time to fete accumulated Depreciation perfectly grounded on use. The formula for the units of production method is
Annual Accumulated Depreciation = (Number of Units Consumed/ Total Units to Be Consumed) * Depreciable Base
For illustration, a company buys a company vehicle and plans on driving the vehicle 80,000 long hauls. The first time, the company drove the vehicle 8,000 long hauls. thus, it would fete 10(8,000/ 80,000) of the depreciable base. If the company drives 20,000 long hauls, it would fete 25 of the depreciable bases as an expenditure in the alternate time, with accumulated Depreciation now equal to$ 28,000($ 8,000 in the first time$ and 20,000 in the alternate time).
Accumulated Depreciation vs. Accelerated Depreciation
Though analogous sounding in name, accumulated Depreciation, and accelerated Depreciation relate to veritably different account generalities. Accumulated Depreciation refers to the life-to-date Depreciation that has been honored that reduces the book value of an asset. On the other hand, accelerated Depreciation refers to a method of Depreciation where an advanced amount of Depreciation is honored before an asset’s life. Since accelerated Depreciation is an accounting method for feting Depreciation, the result of accelerated Depreciation is to bespeak accumulated Depreciation. Under this method, the amount of accumulated Depreciation accumulates briskly during the early times of an asset’s life and accumulates slower latterly. The gospel behind accelerated Depreciation means that newer (i.e. a new company vehicle) are frequently used further than aged means because they’re in better condition and more effective.
Accumulated Depreciation vs. Depreciation expenditure
When an asset is downgraded, two accounts are incontinently impacted accumulated Depreciation and Depreciation expenditure. The journal entry to record Depreciation results in a disbenefit to Depreciation expenditure and a credit to accumulated Depreciation. The dollar amount for each line is equal to the other. There are two main differences between accumulated Depreciation and Depreciation expenditure. First, Depreciation expenditure is reported on the income statement, while accumulated Depreciation is reported on the balance distance. Alternatively, on an affiliated note, the income statement doesn’t carry from time- to time. exertion is swept to retained earnings, and a company “resets” its income statement every time. Meanwhile, its balance distance is a life-to-date running aggregate that doesn’t clear at the time-end. Thus, Depreciation expenditure is recalculated every time, while accumulated Depreciation is always a life-to-date running aggregate.
Special Considerations
Account Adaptations Changes in Estimate Because the Depreciation process is heavily embedded with estimates, it’s common for companies to need to revise their conjecture on the useful life of an asset’s life or the salvage value at the end of the asset’s life. This change is reflected as a change in the counting estimate, not a change in the counting principle. For illustration, say a company was cheapening a $10,000 asset over its five-time useful life with no salvage value. Using the straight-line method, accumulated Depreciation of $2,000 is honored. After two times, the company realizes the remaining useful life isn’t three times but rather six times. Under GAAP, the company doesn’t need to retroactively acclimate fiscal statements for changes in estimates. rather, the company will change the amount of accumulated Depreciation honored each time. In this illustration, since the asset now has a$ 6,000 net book value ($ 10,000 purchase price less $ 4,000 of accumulated Depreciation reserved in the first two times), the company will now honor $ 1,000 of accumulated Depreciation for the coming six times.
Half- year Recognition
A generally rehearsed strategy for cheapening an asset is to fete a partial time of Depreciation in the time an asset is acquired and a partial time of Depreciation in the last time of an asset’s useful life. This strategy is employed to further fairly allocate Depreciation expenditure and accumulated Depreciation in times when an asset may only be used part of a time. For illustration, Company A buys a company vehicle in Year 1 with a five-time useful life. Anyhow of the month, the company will fete six months’ worth of Depreciation in Year 1. The company will also fete a full time of Depreciation in Time 2- 5. also, the company will fete the final half time of Depreciation in Year 6. Although the asset only had a useful life of five times, it’s argued that the asset was not used for the wholeness of Year 1 nor the wholeness of Year 6.
