*Yuanxin (Amy) Yang Alcocer*Show bio

Amy has a master's degree in secondary education and has been teaching math for over 9 years. Amy has worked with students at all levels from those with special needs to those that are gifted.

Lesson Transcript

Instructor:
*Yuanxin (Amy) Yang Alcocer*
Show bio

Amy has a master's degree in secondary education and has been teaching math for over 9 years. Amy has worked with students at all levels from those with special needs to those that are gifted.

Depreciation is the loss of value over time, calculated using accelerated depreciation calculations where the value is lost faster shortly after initial use, but later slows in depreciation. Learn the double declining balance method and see depreciation calculation in two examples.
Updated: 10/27/2021

Meet Ron. He is an accountant, and he is here to help companies keep their financial documents in order. He is here at your printing company today to help you choose a depreciation method. **Depreciation** means you calculate the loss of value in your equipment. Whatever value is lost per year in your equipment you can write in your financial reports and then transfer the appropriate amount to your year-end taxes. By doing this, you are taking into account that your equipment loses value each year, and that affects your company's bottom line. When your equipment loses value, your company loses money.

The basic depreciation calculation assumes that the equipment is used steadily throughout its useful life. But sometimes, you need to make **accelerated depreciation** calculations. This takes into account that some items depreciate more in the first few years of use, so your depreciation amounts in these years are more than later years. There are two common accelerated depreciation methods.

The first method that Ron is going to talk about is the **double declining balance method**. This method takes your basic depreciation percentage for the year and doubles it and multiplies it by the current value of your item.

So, for example, if you were depreciating one of your large printers that cost $120,000 with a life of ten years, the basic depreciation percent per year is 100% divided by ten years or ten percent per year. Multiplying $120,000, the value of the item for year one by ten percent, or 0.1, gives an annual depreciation of $12,000 for your basic depreciation for year one.

The depreciation using the double declining balance method for the first year is $120,000 times 20%, or 0.2, double the percentage used for the basic depreciation calculation. This works out to be $24,000 for the first year.

For year two, the printer has then dropped in value by $24,000 since that is the depreciation you calculated the year before. Subtracting this from the original cost of $120,000 gives $96,000. Multiplying this $96,000 by 20% will give the depreciation for year two. It is $96,000 * 0.2 = $19,200. Keep doing this until you have depreciated your value down to zero.

Let's look at another example. You also have this high end scanner that you bought for $90,000. It has a lifetime of five years. Calculate the depreciation for the first two years using the double declining balance method.

A lifetime of five years gives a basic depreciation of 20% per year (100% divided by 5). Doubling this gives 40% per year for the double declining balance method. For year one, the depreciation is $90,000 * 0.4 = $36,000. For year two, the value drops to $90,000 - $36,000 = $54,000. The depreciation for year two is $54,000 * 0.4 = $21,600.

Ron now goes on to tell you that there is another method you can use to accelerate your depreciation in the first few years. This method is called **sum of the years' digits**. Using this method, the depreciation percentage is greatest for year one and decreases each year based on the life of the item. Ron shows you an example using the same printer that you bought for $120,000 with a life of ten years. This method is called the sum of the years' digits because you add up the years of life that the item has: 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10. This gives you a total of 55.

To calculate the depreciation percentage for each year, you divide each year by the total. So for year one, the depreciation percentage is 10 / 55. For year two, it is 9 / 55. For year three, it is 8 / 55. And you keep going until you reach year ten with a depreciation percentage of 1 / 55. Each year you multiply this percentage by the original cost of the item. So, year one has a depreciation of $120,000 * 10 / 55 = $21,818.18. Year two has a depreciation of $120,000 * 9 / 55 = $19,636.36. Of course, like all depreciation methods, you keep going until you reach a depreciated value of zero.

Let's go back to the scanner and calculate the depreciation using the sum of the years' digits for years one and two.

The scanner has a life of five years. So, the sum of the years' digits is 1 + 2 + 3 + 4 + 5 = 15. Year one has a depreciation percentage of 5 / 15. Year two has a depreciation percentage of 4 / 15. The cost of the scanner is $90,000. So, the depreciation for year one is $90,000 * 5 / 15 = $30,000 and year two is $90,000 * 4 / 15 = $24,000.

As you can see, the depreciation amounts are a bit different for each method. The method you choose depends on how much you want to depreciate the first few years and also on how much more use you get out of the item in the first few years.

Now, let's review what we've learned. **Depreciation** means you calculate the loss of value in your equipment. **Accelerated depreciation** means you depreciate more in the first few years of use of an item. There are two common accelerated depreciation methods you can use.

First is the **double declining balance method**. This method takes your basic depreciation percentage for the year and doubles it. You then take this percentage and multiply it by the current value of your item. For example, if an item has a life of ten years, the basic depreciation percentage is ten percent. The percentage using the double declining balance method is 20% per year. Each year, you multiply the current depreciated value of the item by the percentage.

The next method is the **sum of the years' digits**. Using this method, the depreciation percentage is greatest for year one and decreases each year based on the life of the item. To use this method, you add the years of the item. For example, an item with a life expectancy of five years has a sum of the years' digits of 1 + 2 + 3 + 4 + 5 = 15. Year one, then, has a depreciation percentage of 5 / 15. Year two has a depreciation percentage of 4 / 15. Year three, 3 / 15. Year four, 2 / 15. And year five, 1 / 15. Each year, you multiply this percentage with the original cost of the item.

You should have the ability to do the following after watching this video lesson:

- Define depreciation and accelerated depreciation
- Explain the two common accelerated depreciation methods

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