I just join a newly set up company. Now I need to choose a depreciation method whether it should be on a straight-line basis(SL), unit of production basis, declining/reducing balance basis or sum of digit (SD) methods? So how do I go about doing it?
Based on your Capital Budget you should able to know what are the fixed assets concerned.
Based on certain assumption like life span and salvage value if any, compute a projected table of annual depreciation charge based on the various depreciation methodologies.
A simplified of yearly depreciation is appended below for illustration:-
The general principle of providing depreciation is based on the matching concept. Hence, we need to understand the impact of each methodology re: matching the income generated from the fixed assets against it expense ( in this case the yearly depreciation amount)
Based on the above:
Of course, bear in mind that like choosing the best stock valuation method, the choice of selecting the correct depreciation methods varies with many other factors like for example your company’s nature of business, its industry trend, changes in technologies, etc.
For example say an equipment that has a very high level of obsolescence because of changes in technology/fashion might even require a double declining balance depreciation methodology which might suitable when you are recording early years of high sales generated from the fixed asset.
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