Definition of Depreciation Methods

• Depreciation is accounted for on the balance sheet and on the income statement. Stockbyte/Stockbyte/Getty Images

  The Accounting Info website defines deprecation as "a systematic and rational process of distributing the cost of tangible assets over the life of assets." There are GAAP (generally accepted accounting principles) that state which depreciation methods are acceptable. The three main GAAP depreciation methods are straight line depreciation, declining value depreciation and sum-of-the-years'-digits depreciation. MACRS is also an acceptable depreciation method, but it is not as much an accounting method as it is a tax concept.

Straight Line

• Straight line depreciation assigns each asset a resale or salvage value. It subtracts that salvage value from the original cost of the asset, and divides that number by the number of years the company plans to hold the asset to get the yearly depreciation value. Here is the formula:

  (cost-salvage value) / # of years asset is held for = depreciation each year

  For example, ABC Company buys a desk for $500 that has a salvage value of $100. ABC plans to keep the desk for four years.

  ($500-$100) / 4 = $100 each year in depreciation

Declining Balance

• Declining balance depreciation multiplies the book value of each asset by a depreciation rate. The depreciation rate is calculated by converting the number of years the asset is held for, or its useful life, into a percentage.

  For example, ABC Company has a computer worth $1,000, with a useful life of five years. If the useful life is five years, the asset depreciates 1/5, or 20 percent each year. The computer would depreciate ($1000) * 20% = $200 each year

  Sometimes, companies use double declining balance. Double declining balance multiplies the depreciation rate by two and then computes the formula, according to Accounting Info.

Sum-of-the-Years'-Digits

• This depreciation method is similar to straight line depreciation, but with a variation. The asset's salvage value is still subtracted from the asset's original cost; the first part of the formula is the same:

  (cost-salvage value) / sum-of-the-years'-digits

  The second part of the formula is computed by dividing the useful life by the sum of the numbers, one through the useful life. For example, if an asset has a useful life of seven years, the sum-of-the-years'-digits in the first year would be:

  7 / (1+2+3+4+5+6+7) or 7/28

  The sum-of-the-years'-digits in the second year would be 6/28; it would be 5/28 in the third year; and so on, according to Accounting Info.

MACRS

• MACRS stands for modified accelerated cost recovery system. Under MACRS, there are two subdivisions, GDS (general depreciation system) and ADS (alternative depreciation system). Generally, GDS is used; ADS is only used under special circumstances. The only differences between GDS and ADS are that you cannot claim a special depreciation allowance under ADS and there are some differences in the recovery periods on certain assets, according to IRS.gov. This method of depreciation is computed by multiplying the value of the asset by the appropriate number from the MACRS table. You know where to look on the MACRS table by consulting IRS publication 946. IRS Publication 946 assigns a recovery period to each type of property under MACRS.