What Is Monthly Depreciation?
Depreciation is both the normal trend of decrease in the value of certain assets with the passage of time, and the accounting expense that represents this. It is charged once at the end of each accounting period and accrues over time to represent the base asset's drop in value.
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Matching Principle
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Depreciation exists as an accounting expense because of the matching principle. Said accounting principle requires that expenses be matched to the same time period as the revenues that their cost helped earn. Since depreciation represents the wear and tear that assets undergo in their routine use, depreciation expense should be matched to accounting time periods in which those assets were used in the course of business operations. Said practice exists in order to better represent the truth of the business' financial circumstances.
Accounting Treatment
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Calculating depreciation expense is formulaic. Assets liable to be depreciated are calculated to possess residual values and usage lives. Residual value is the amount that the asset can be expected to be sold for at the end of its use, while usage life is the length of time that the asset can be expected to remain useful. Residual value subtracted from the asset value results in the amount of value that will be depreciated over the asset's lifespan. How much depreciation is charged each accounting time period depends on the depreciation formula used.
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Straight Line Method
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Perhaps the simplest and one of the most common depreciation methods is straight line. Quite simply, the accountant estimates a residual value and a usage life, derives the amount to be depreciated and then divides that amount over the number of accounting time periods in its usage life. Straight line method allocates an equal amount of depreciation expense to each accounting time period and is most appropriate when the drop in value for an asset in use is consistent over time.
Declining Balance Method
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Declining balance method and its cousins are perhaps the most important depreciation methods, if only for their common usage in taxation accounting. Declining balance method takes the amount to be depreciated and then deducts a set percentage of its remaining value each accounting time period. At the end of the asset's usage life, the remainder of the amount to be depreciated is simply deducted. Variations exist on how much set percentage is charged each period and what percentage rates are charged for what classes of assets. Declining balance methods are most appropriate for assets that see an immediate drop in value after purchase, such as cars and computer equipment.
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