### Depreciation

There are a few different formulas for applying depreciation. The three most common methods are as follows.
1. Straight Line Depreciation
2. Sum of Years
3. Double Declining Balance

Straight Line Depreciation
The simplest and most commonly used depreciation method is straight line depreciation. This method determines a total amount to depreciate then applies that annually. This calculated by first subtracting the salvage value (aka residual value) of an assett from it's original purchase price. Then divide that sum by the years of "useful life" the assett is predicted to provide. (Purchase Price - Approximate Salvage Value) ÷ Years of Useful Life. The obvious problem here is that the useful life of a product is not a certainty. So as an accounting concept "useful life" is understood to be an adjustable figure. The value of an assett can always be depreciated slower or faster over coming years.

Example:
A hypothetical laptop is worth \$1,000. It can be scrapped at the end of a 5 year life for \$100. It's value can be depreciated as follows. 1,000 - 100 = 900. Then divide by the number of years in it's useful life 900 ÷ 5 = 180. You can depreciate that laptop \$180 per year over it's 5 year life. If we decided in year 4 that the laptop was good for an extra 5 years, we could only deduct a total of \$180 over the next 5 years or \$36 per year.

Year 1: 20% (\$180)
Year 2: 20% (\$180)
Year 3: 20% (\$180)
Year 4: 20% (\$180)
Year 5: 20% (\$180)

Sum of the Years
This a method of applying accelerated depreciation. It essentially front loads what you can deduct instead of spreading it over the useful life. First we take the asset's useful life and add together the digits for each of those years. If we take that hypothetical laptop again we add 1 + 2 + 3 + 4 + 5 = 15.

Each number is then divided by the "sum of years" to determine the percentage by which the asset should be depreciated each year.
The largest deduction is taken the first year and a lesser amount each successive year.

Year 1: 5 ÷ 15 = 33% (\$297)
Year 2: 4 ÷ 15 = 27% (\$243)
Year 3: 3 ÷ 15 = 20% (\$180)
Year 4: 2 ÷ 15 = 13% (\$117)
Year 5: 1 ÷ 15 = 07% (\$63)

The percentages for each year will add up to 100% excluding rounding error.

Double Declining Balance
The double declining balance is another accelerated depreciation method which draws on the math used in straight-line depreciation. First compute the straight-line depreciation. Then figure out the total percentage of the asset that is depreciated the first year and double it. So in this case you can look at the math above and see that Straight line depreciation applied \$180 the first year or 20%. Under this method, double that figure the first year: 40% or \$360. That figure should be applied annually until the remaining value makes that impossible. After that sharp curve has been expended, the values from Straight line depreciation shoudl be used until they too are expended. In this case that means having no value to depreciate in the 4th and 5th year.

Year 1: 5 ÷ 15 = 40% (\$360)
Year 2: 4 ÷ 15 = 40% (\$360)
Year 3: 3 ÷ 15 = 20% (\$180)
Year 4: 2 ÷ 15 = 0% (\$0)
Year 5: 1 ÷ 15 = 0% (\$0)

So let's look at a simple graph to see the difference across the three types. It's pretty obvious already but the visual just drives home the ideas at play here. ### DEDUCTIONS:

First let me reccomend that you let an accountant handle this. Secondly I'll add that in most jurisictions a taxing authority will specify which methods of deduction are allowable. Assuming they are all allowable let's talk math. While straight line depreciation may not be exciting, it's an easy sytem to maintain which itself has value. The other systems require better asset tracking to ensure full depretiation. In other words the value of depreciation as a practice is not just it's tax advantages. It's also connected to inventory control and asset management.

### CONCLUSION:

Depreciation is a tax advantage that businesses have and individuals do not. As a Project Manager you need to understand concepts like this in order to really wrangle large projects. Tools like depreciation effect your budget and your budget effects everything else. It is also highly relevant in the area of insurance as you can never insure for replacement value, only book value. An idea tied to the remaining value of depreciated goods.