3.4.4 (HL)—Depreciation methods

Depreciation records the falling carrying value of a non-current asset through time, use or obsolescence. Straight-line depreciation spreads depreciable cost evenly; units-of-production depreciation follows measured use.

Straight-line annual depreciation is (historic cost − residual value) ÷ useful life. Under units of production, first calculate depreciable cost per expected unit, then multiply by the units or hours used in the period.

For a €280,000 balloon with €52,500 residual value and a seven-year life, straight-line depreciation is €32,500 per year and the year-one book value is €247,500. A heavily used machine may be better represented by usage-based depreciation.

Depreciation is not a cash payment and it does not necessarily equal current market-price change. Keep historic cost, residual value, useful life and the selected method consistent throughout the calculation.