Calculating depreciation depends on the item you are depreciating, and whether you want to calculate by time or by use. Three methods of calculating depreciation exist: the declining balance method, the straight line method and the sum of the year's digits method. In the declining balance method, depreciation equals the book value multiplied by the depreciation rate. The book value is equal to the cost minus the accumulated depreciation.
Another version of the declining balance method is the double declining balance, which is calculated as the straight-line depreciation multiplied by 200 percent. The 150 percent declining balance method is calculated similarly to double declining balance, with the straight-line depreciation being multiplied by 150 percent.
With the straight-line method, depreciation is calculated by subtracting the salvage value from the original cost, and then dividing by the useful life of the item. The declining balance method and straight-line method are both useful for items of equipment that are used fairly regularly, such as a truck or backhoe.
The sum of the year's digits method calculates depreciation by subtracting the salvage value from the original cost, and then multiplying by a fraction. This fraction is determined by the number of years of useful life. For example, a five-year useful life would be (1+2+3+4+5) = 15, and each year's depreciation would be the fraction of 5/15, 4/15, 3/15, 2/15 or 1/15 as the years progress.
