Fixed assets in accounting will experience depreciation because the value decreases from time to time. The longer the time or current period, the value of these assets will continue to decrease. To maintain the continuity of business activities of the planned project it is necessary to calculate the amount of depreciation costs each year. Every healthy company generally has depreciation or depreciation reserves to maintain the continuity of business activities, in addition to maintaining product quality and making it easier to keep up with changes in assets with technological changes.
Depreciation funds are costs charged to consumers through the calculation of the cost of production. Thus, like a business feasibility study, actually has been calculated depreciation funds as funds to replace assets that are no longer economical. The size of the cost of depreciation performed on each asset depends on the price of the asset, economic life, and the method used in depreciation.
Assets Depreciation Method
In fixed assets there are several methods of depreciation of assets whose use is adjusted to the needs. Some methods of depreciating assets include the straight-line depreciation method, the declining balance depreciation method, and the depreciation method for the number of years. The following is the understanding of each method along with the advantages and disadvantages of each according to Dian (2018).
The straight-line depreciation method is a method of depreciation of fixed assets where the depreciation expense of fixed assets per year is the same until the general economic end of the asset.
The declining balance depreciation method is a depreciation method of fixed assets determined based on a certain percentage.
The method of depreciating the number of years or the sum of the years digit method, the amount of depreciation of fixed assets per year the number decreases based on the number of years method.
Weaknesses & Strengths of Each Depreciation Method
Of course, each shrinkage method has advantages and disadvantages. Following are the weaknesses and strengths of each shrinkage method:
a. Straight-line depreciation method
In the straight-line depreciation method, the depreciation expense for each year is of equal value and each is not affected by the output or output produced. This method emphasizes the aspect of time rather than the aspect of usability. The straight-line shrinkage method is widely used in companies because of its easier application. The tariff calculation in this method is:
Depreciation Rate = Cost of Residual Value: Estimated Usefulness
The advantage of the straight-line method is that it is easier to use and apply in accounting and easier to determine depreciation rates. Although it has advantages, this method also has shortcomings including maintenance and repair costs considered the same for each period, the economic benefits of assets every year are the same, the depreciation expense recognized does not reflect the effort used in generating revenue, profits generated each year do not reflect the level actual return on the useful life of the asset.
b. Decreased balance depreciation method
The declining balance depreciation method is a method of depreciating fixed assets which is determined based on a certain percentage and calculated from the book price for the year. The amount of depreciation percentage is twice the percentage or depreciation rate of the straight-line method.
For the calculation, this method is done by multiplying a certain percentage or rate by the book value of an asset. The book value at the end of each graph decreases causing a decrease in the burden of depreciation. The advantage of this method is that it is more cost-effective when compared to the straight-line depreciation method, but the drawback is that it is more complicated and difficult to apply in accounting because of the many calculation variables that must be involved.
c. The method of depreciation is the number of years
In this depreciation method, the amount of depreciation of fixed assets decreases each year, and is almost the same as the depreciation balance reduction method. But in this method, the depreciation is accelerated based on the consideration of maintenance or maintenance costs, as well as the improvement of fixed assets which tends to increase as the age of the fixed asset itself increases.
The advantage of this method is that it is more cost-effective, but unfortunately there are tax rules that limit the use of the depreciation method for the number of years. In tax reporting, this method cannot be used, so very few companies use the depreciation method for the number of years in their application.