CHAPTER IX
DEPRECIATION—METHODS OF
CALCULATING
Methods of Calculation
Many methods of reckoning depreciation have been devised; some good, some bad, and some too theoretical and involved ever to serve the practical needs of business. It is proposed here to explain those methods which have found most favor and, in Chapter X, to discuss their effects from the standpoint of the true purpose of any scheme of depreciation.
There are several ways in which the depreciation calculation can be made, and the methods may be classified broadly, though with some overlapping, under four heads. These classes are:
- 1. Proportional Methods
- 2. Variable Percentage Methods
- 3. Compound Interest Methods
- 4. Miscellaneous Methods
Factors of Calculation
The factors which must be known under most methods of calculation are:
- 1. Original cost of the asset
- 2. Scrap or residual value
- 3. Estimated service life
- 4. Under some methods, an arbitrary interest rate
By original cost is meant full cost of the asset in position ready for use. By scrap value is meant the estimated value of the asset at the time of its discard, when removed from position and ready for sale or other mode of disposal. This is sometimes called its salvage value as distinguished from its value while still in position to render service but awaiting discard or break-up. By estimated service life is meant the time during which the asset will be used for service. This may be expressed in ordinary units of calendar time, such as the year; or in units of service time, such as working hours; or finally in units of output, such as tons, cubic feet, kilowatt hours, etc.
Symbols to be Used