There are several methods that can be used to compute depreciation for plant assets. These methods include the straight line method, the units of production method, the double-declining balance method, and the sum-of-the-years-digits method.
The straight line method involves allocating the depreciable cost of the asset evenly over its useful life. This method is based on the assumption that depreciation depends only on the passage of time.
The units of production method is based on the assumption that depreciation is mainly the result of use and that the passage of time plays no role in the depreciation process. This method is based on the number of units of output or use expected from the asset.
The declining balance method results in larger amounts of depreciation in the early years of an asset's life and smaller amounts in later years. This method is based on the assumption that most plant assets are more efficient when new and provide more and better service in the early years of their useful life.
The sum-of-the-years-digits method is an accelerated method of depreciation that involves allocating a larger portion of the depreciable cost to the early years of an asset's life. This method is based on the assumption that the benefits or services received in the early years of an asset's useful life are greater.
