There are several different methods of depreciation. Of these the ones are,
- Straight line method.
- Reducing balance method.
- Sum of the digits method.
Straight line method
The total depreciable amount is charged in equal installments to each accounting period over the expected useful life of the asset. So the net book value of the fixed declines at a steady rate, or in a straight line over time.
The annual depreciation charge = (cost of asset – Residual value) / Expected useful life of the asset
Reducing balance method
The reducing balance method of depreciation calculates the depreciation charge as a fixed percentage of the net book value of the asset, as at the end of the accounting period.
The annual depreciation charge = (cost of asset – accumulated depreciation) x Percentage
Sum of the digits method
This is a variant of the reducing balance method, based on the estimated useful life of an asset.
If an asset has an estimated useful life of three years, then the digits 1, 2 and 3 are added together, giving a total of 6. Depreciation of 3/6 for first year, 2/6 for second year, 1/6 for third year of the depreciable amount is charged in the respective years.