Determining the best method for depreciating tangible fixed assets can be difficult. This article discusses three of the most common methods -- the straight line method, the units-of-production method, and the double declining balance method.
In order to begin depreciating an asset, three things must first be determined.
- the initial cost of the asset
- the expected useful life of the asset
- the estimated value of the asset at the end of its useful life
The initial cost of the asset is the cost to purchase the asset along with any amounts spent to get the asset ready to use. Sales taxes, freight, and installation costs are examples of some of the costs that can be included in the cost of the asset for depreciation purposes.
The expected useful life should be determined at the time the asset is placed in service. According to the Internal Revenue Service guidelines, most machinery and equipment have a useful life of seven years, while automobiles and light duty trucks have a useful life of five years. These guidelines are used for federal income tax purposes; companies may use different guidelines for financial reporting purposes.
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