Depreciation is an accounting process that is used to distribute the cost of an asset over its life. Generally Accepted Accounting Principles (GAAP) require businesses to record depreciation of tangible assets based on a depreciation schedule. The depreciation schedule lists all tangible assets along with the specific depreciation method used. It is essential to maintain consistent records of all tangible assets to be in compliance with both GAAP and applicable tax laws.

## Depreciation Types

1. Choose a depreciation method. The straight-line, declining balance, and sum-of-the-years'-digits methods are the most common depreciation types used. Once you have selected a method for a particular asset, you must use that same method throughout the life of the asset. The straight-line method is the simplest method used most often by businesses. This method consists of dividing the cost of the asset equally over its expected years of use. However, you may want to depreciate the asset more quickly in its first years of use. In such cases, you might want to choose to use an accelerated method, such as the declining balance or sum-of-years' digits methods.

2. Determine the number of years the asset will remain in use. Many companies use the modified accelerated cost recovery system (MACRS), which is set by the IRS for tax reporting purposes. MACRS classifies assets into various classes and determines the number of years over which you should depreciate a particular type of asset. For example, office furniture may be depreciated over 10 years, while a new computer should be depreciated over six years.

3. Calculate the depreciation using the straight-line method. The straight-line method divides the cost of the asset by the number of years you expect the asset to be in service. For example, if your business paid $274 for a printer that you expect to use for three years, divide 274 by three. The depreciation of the asset is $91.33 per year for each year that the asset is in service.

## Declining Balance Method

1. Determine the depreciation rate. This is the percentage by which you would like to depreciate the asset each year. To calculate this rate, divide 100 percent by the number of years the asset will be in use. For example, if you expect the asset to last for four years, divide 100 by four. In this example, the depreciation rate is 25 percent.

2. Calculate the book value of the asset. The declining balance method allows you to apply the depreciation rate against the non-depreciated balance. With this method, the depreciation value declines with each successive year. To calculate depreciation using this method, you must first calculate the book value of the asset using the following equation: Book value = Cost - Accumulated depreciation.

3. Calculate the depreciation of the asset. Use the following equation: Depreciation = Book value x Depreciation rate. The book value of the asset is multiplied by the depreciation rate.

## Sum-of-Years' Digits

1. Add the digits of each year of the asset's life. For example, if the asset will be in use for five years, then add 5 + 4 + 3 + 1. The sum of the year's digits is 15.

2. Find the percentage of depreciation for each year. Each year is divided by the sum of the digits. For example, in the fifth year, the percentage is obtained by dividing five by 15 to get a percentage of 33.34. In the fourth year, divide four by 15 for a percentage of 26.67. Continue with this down to one.

3. Calculate the depreciation expense. Multiply the cost of the asset by the appropriate percentage of depreciate for each year. For example, in the fifth year, multiply the cost of the asset by 33.34 percent. In the fourth year, multiply the cost of the asset by 26.67 percent, and continue on down to one.

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