The assumptions behind various methods of calculating depreciation differ, as do the effects of using a particular type on a business’ bottom line and balance sheet. A comparison of straight-line and double-declining depreciation shows when each type is appropriate.

Straight-line depreciation is, as its name implies, linear. It begins with the initial cost of an asset and its projected salvage value, or what it will bring in when its useful lifespan is over. The lifespan is then projected, and the difference between the initial cost and salvage value is divided by that lifespan. For example, if an asset costs $100,000 and will bring $10,000 in salvage values after 10 years, the depreciation per year is $100,000-$10,000/10, or $9,000. That is the value that will be recorded under expenses for a particular year. Using the straight-line method, depreciation rates will remain the same for the life of the asset. Both the salvage value and the lifespan of the asset are assumptions, though both are informed conjectures.

Double-declining depreciation is a method in which depreciation acts exponentially. For example, at a depreciation rate of 20 percent, an item’s book value at the beginning of each year depreciates by 20 percent. This will result in greater expenses recorded at the beginning of the item’s lifespan and lower expenses as it ages. This is ideal for fixed assets whose value declines in this way and for items the company expects to have to replace in short order, according to Forbes.com. Double-declining depreciation will often cause a sale of an asset to reflect a greater net gain than the same sale of the same asset would show in straight-line depreciation.

Fixed asset management is an important part of business accounting, and choosing the best depreciation method to use for each asset is crucial. With some research, it is easy to do so.

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