Depreciation

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What is depreciation?

Depreciation consists of the periodic decline in the value of an asset from wear and tear, the passage of time or its age. This allows the value of the asset to be approached and adjusted, at any time, to its real value.

The depreciation It is a very important part of accounting, which is why it must be taken into account in the valuation of the assets of a company.

Types of depreciation

We can distinguish 3 types of depreciation:

Physical: It is the physical deterioration of an asset. It results in a decrease in the asset's ability to offer its service.
Functional: It results from the change in the demand for the services that the asset provides. This demand may vary due to the use of another more efficient unit, because there is no more work in the class running the asset, or because the capacity of the asset was exceeded by other work.
By obsolescence: It consists of the loss of the value of productive equipment and machines in general, due to technological advance and the alteration of the cost related to productive elements, labor and capital, or variations in demand.

Methods for calculating depreciation

The depreciation methods most important are the following:

Straight line method

This is one of the methods most used by companies. It consists of dividing the cost of the asset by its useful life.

Formula for calculating depreciation using the straight-line depreciation method.

Production units method

To determine depreciation using this method, the value of the asset is divided by the number of units it produces.

The result is then multiplied by the number of final units produced and, in turn, multiplied by the depreciation cost of each unit. This method goes hand in hand with productivity.

Formula for calculating depreciation using the unit depreciation method.

Sum method

This is an accelerated depreciation method that consists of determining a higher depreciation rate during the first years of the asset's useful life.

Formula for calculating depreciation using the sum method.

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