About depreciation methods

The Straight line method of calculating depreciation is the simplest and most popular method.
With this method, the depreciation expense is spread evenly over the estimated useful life of the asset.
This method assumes that physical obsolescence of an asset occurs evenly from the time the asset has been placed into service until the full write-off of its cost.

When you use the Straight line calculation method, the depreciation expense is calculated by using the following parameters:

• The depreciable basis, which is the asset acquisition cost minus the asset salvage amount (if one is specified)
• The straight line rate, which is calculated as 100% * (1 / N useful life)

This calculation method is expressed in the following formula:

D = (Ac - Sa) * SL rate

where

SL rate = 100% * (1 / N useful life)

The symbols in the formula have the following meanings:

• D: The depreciation expense (for a year or an accounting period)
• Ac: The acquisition cost of an asset
• Sa: The salvage amount (or the residual value) specified for the asset in the Fixed assets (FA303000) window
• N useful life: The estimated time period that the asset is expected to be used, starting from the placed-in-service date

To configure the depreciation method based on this calculation method, you need to select Straight line in the Calculation method field in the Depreciation methods (FA202500) window.

The Declining balance calculation method allows you to mostly depreciate an asset in the early years of its useful life, so that by using this method, you can accelerate the depreciation of the asset.
Practically, it means that the a company writes off the cost of the asset while the asset is relatively new.
This method is expedient for the assets that become obsolete very quickly due to, for example, technological innovation.
The acceleration of depreciation is performed by applying the acceleration rate.
A company can set the acceleration rate up to 200%. The calculation formula of this method uses the following parameters:

• The net book value of an asset.
• The depreciation rate, which is calculated as 100% * (1 / N useful life) for the straight line method, but with respect to the declining balance method, in which the acceleration factor should be applied, you can use the increased multiplier (in percent) depending on the acceleration factor that your company set up. Thus, the multiplier can be set as 125%, 150% or 200%. In Visma Net, you enter this value in the DB multiplier field while you configure the Declining balance depreciation method in the Depreciation methods (FA202500) window.

Thus, the formula of calculating the depreciation expense by using the Declining balance depreciation method is the following:

D = NBV * DB rate

where

DB rate = DB multiplier * (1 / N useful life)

The symbols in the formula have the following meanings:

• D: The depreciation expense (for a year or an accounting period)
• NBV: The net book value of an asset at the beginning of the year or period (that is, the asset cost minus the accumulated depreciation)
• DB multiplier: The percent of depreciation acceleration that a company sets up for an asset
  Note: The depreciation method in which you use 200% as the multiplication factor is known as the double declining balance (DDB) depreciation method.
• N: The asset useful life, in years (of accounting periods)

To configure the depreciation method based on this calculation method, you need to select Declining balance in the Calculation method field in the Depreciation methods (FA202500) window.

This calculation method does not depreciate the asset to zero.
Thus, if you need to fully depreciate an asset, you can set the system to switch the calculation method to Straight line when the depreciation amount calculated by using the Straight line method is greater than the depreciation amount calculated for the Declining balance method.
To set the system to switch the calculation method, select the Switch to SL check box in the Depreciation methods (FA202500) window when you configure the depreciation method based on the Declining balance calculation method.

The Sum of the years' digits calculation method accelerates depreciation more than the straight line method but less than the declining balance method. The depreciation expense per year is equal to the depreciable basis multiplied by the depreciation rate, where the depreciation rate is the ratio of the number of years remaining to depreciate the asset to the sum of the years' digits.

For example: Suppose that an asset's useful life is 3 years. In the first year, the depreciation rate is 3 / (1 + 2 + 3) = 1/2.
Thus, the asset would be depreciated by 50% in the first year of its useful life.

To configure the depreciation method based on this calculation method, you need to select Sum of the years' digits in the Calculation method field in the Depreciation methods (FA202500) window.

The Remaining value calculation method is similar to the Straight line method.
The difference between the two methods is that the remaining value method always depreciates the asset by the end of its useful life, so that the depreciable basis minus the accumulated depreciation will be zero.

The remaining value calculation method is used if, for example, the useful life of an asset will end earlier than had been planned.
Regardless of which depreciation method was used to depreciate the asset, the user can switch the method to the Remaining value method at any time. As a result, the asset will be fully depreciated to the amount of zero by the end of its useful life.

To configure the depreciation method based on this calculation method, you need to select Remaining value in the Calculation method field in the Depreciation methods (FA202500) window.

The Dutch method 1 and Dutch method 2 calculation methods are commonly used for calculating depreciation in the Netherlands.
These methods are similar to the declining balance calculation method, which allows you to mostly depreciate an asset in the earlier years of its useful life.

To configure a depreciation method based on these calculation methods, you need to select either Dutch method 1 or Dutch method 2 in the Calculation method field in the Depreciation methods (FA202500) window.

With these methods, the depreciation expenses are calculated by using the following formula:

D = NBV * D rate

The symbols in the formula have the following meanings:

• D: The depreciation expenses (per period).

• NBV: The net book value of an asset at the beginning of the period.

  The net book value is calculated as the asset’s acquisition cost minus the total accumulated depreciation by the beginning of the period.

• D rate: The depreciation rate.

It follows from the formula that both of these methods involve applying the specific depreciation rate.
The difference between these methods is that different parameters are required for calculating this depreciation rate, as described below.

The depreciation rate for the Dutch method 1 method is calculated by using the asset salvage amount and the asset useful life (number of periods). The rate, in this case, is calculated in a way that allows you to fully depreciate an asset during its expected useful life.

The Dutch method 1 uses the following calculation formula:

D rate = 1 - (Sa / Ac) ^ (1/n)

The symbols in the formula have the following meanings:

• D rate: The depreciation rate
• Sa: The salvage amount of an asset
• Ac: The asset acquisition cost
• n: The number of periods of asset useful life

The depreciation rate for the Dutch method 2 method is calculated by using the constant percentage and the number of periods in a year.
The constant percentage defines the part of an asset's net book value that should be depreciated during this year.

The Dutch method 2 uses the following calculation formula:

D rate = 1 - (1 - Percentage / 100) ^ (1/N)

The symbols in the formula have the following meanings:

• D rate: The depreciation rate.
• Percentage: The constant percent that defines which part of the asset net book value should be depreciated (in the Depreciation methods (FA202500) window, you should enter this value in the Percent per year field).
• N: The number of periods in a year