What are the types of depreciation methods used in accounting?

The main types of depreciation methods used in accounting are straight-line, declining balance, units of production, and sum of years' digits.

Straight-line depreciation is the most commonly used and simplest method. It involves evenly spreading the cost of an asset over its useful life. For example, if a company purchases a machine for £10,000 and expects it to last for 10 years, they would depreciate it by £1,000 each year. This method is straightforward and easy to understand, making it a popular choice for many businesses.

The declining balance method, also known as reducing balance, involves depreciating the asset at a constant rate. This means that the amount of depreciation decreases each year. This method is often used for assets that lose value quickly in the early years of their life, such as vehicles or technology equipment.

Units of production is a method that depreciates an asset based on its usage or output, rather than time. For example, a company might depreciate a machine based on the number of units it produces. This method is particularly useful for assets whose wear and tear is more closely related to their level of activity than their age.

The sum of years' digits method is a bit more complex. It involves adding up the digits of the years of the asset's useful life and then using this sum as a denominator to calculate each year's depreciation expense. This method results in a higher depreciation expense in the early years of an asset's life and a lower expense in the later years.

Each of these methods has its own advantages and disadvantages, and the choice of method can significantly impact a company's financial statements. Therefore, it's important for businesses to carefully consider which method is most appropriate for their specific circumstances.