If your company has not engage an accounting firm in Johor Bahru, you probably want to know how to calculate depreciation. When you want to report and calculate depreciation, there are two accounting principles that you have to know, which are the matching principle (Also see Relationship Between Matching Principle & Accounting Period) and cost principle. There are a few methods of depreciation that achieve the matching principle. You can categorise the depreciation methods into two groups, that are straight-line depreciation and accelerated depreciation but none of these affect the cash flow (Also see Introduction to Statement of Cash Flow).
This type of depreciation is probably the most common approach of matching a plant asset’s cost to the accounting periods that it is still in use. By using the straight-line method of depreciation, you will allocate the same percentage or amount of the price of an asset in every accounting year. You may know how much an asset has depreciated throughout its entire useful life by performing some calculation by using the equation below.
The total amount of depreciation = The cost of the asset – Its expected salvage value
To have a clearer understanding of straight-line depreciation, let us study the case below.
Assume that a firm spends RM500,000 to buy a machine and it is expected to have a useful life of a decade. After the ten years, the firm predicts that it can obtain RM20,000 as its salvage value. If you calculate the depreciation under the straight-line method, the machine will experience a depreciation of RM48,000 in each full accounting year, which is 10% of the RM480,000 which requires to be depreciated throughout its useful life.
What will happen if a firm purchases an asset in the middle of an accounting year? If this happens, the asset will undergo depreciation of RM24,000 in the first and the eleventh accounting year. From year 2 to year 10, the depreciation will be RM48,000 in each year.
In accelerated depreciation, you will allocate the cost of the plant asset more quickly than that of in straight-line depreciation (Also see What is depreciation and impairment?). Compared to the latter, accelerated depreciation indicates that an asset will depreciate at a faster pace in the first few years, and its speed of depreciation will decrease in the later years of its life. Keep in mind that the overall amount of depreciation over the life of an asset will be equal to each other no matter what kind of depreciation method you use. Thus, the timing of the depreciation between accelerated depreciation and straight-line depreciation is different.
There are a lot of methods of accelerated depreciation, for instance, 150% declining balance, 200% declining balance which is also known as double-declining balance, as well as sum-of-the-years’ digits (SYD). These are acceptable methods the Financial Reporting Standard 16: Property, Plant and Equipment.