The selection of the depreciation method is the most important decision. Like straight-line method would be used when the amount of asset’s service is used up is approximately the same every period. An accelerated method is used when an asset is more productive in the earlier years of its estimated life.
- In calculating depreciation, certain factors like the cost of assets, the salvage value, and the useful life of the assets are required to be considered. The useful life is generally considered in terms of a number of periods but may be expressed as production capacity for units- of production approach.
- The decision regarding the depreciation application date is important. It is normally calculated from the date of acquisition of the asset to the date the asset is disposed of. However, companies sometimes establish their own conventions in this regard.
It is legitimate to consider changing the rule of application of depreciation from the first day of the month nearest to the purchase date of an asset to the first date of the following month. However, the effect of such change in the calculations of income has to be disclosed by way of notes to the financial statements Changing the rule of application of depreciation from the first day of the month nearest to the purchase date of an asset to the first date of the following month. will have the following effects:
- When using the straight-line method, the first period of depreciation will be shortened by the number of days from the purchase date to the first date of the following months, and accordingly, less depreciation will be charged to income. This will have the effect of increasing the income.
- When using the accelerated method, the reduction in depreciation will be greater as compared to the straight-line method, and thus income would increase with that extra effect of depreciation.