Final answer:
The three primary methods for depreciating assets are Straight-Line, Declining Balance, and Units of Production, each with different ways of allocating an asset's cost over its useful life. The method chosen depends on the asset's usage, benefits pattern, and financial reporting goals.
Step-by-step explanation:
The three primary methods for depreciating assets are the Straight-Line method, the Declining Balance method, and the Units of Production method.
- Straight-Line Depreciation: This method spreads the cost evenly over the useful life of the asset. It is calculated by dividing the difference between the asset's cost and its salvage value by the number of years of expected use.
- Declining Balance Depreciation: A method that accelerates the depreciation, it calculates depreciation based on a fixed rate but applies it to the decreasing book value of the asset each year.
- Units of Production Depreciation: This method bases depreciation on actual use of the asset. It allocates the asset's cost based on the units it produces or the hours it operates, rather than the passage of time.
Choosing the appropriate depreciation method depends on the type of asset, the expected pattern of economic benefits, and the preferences of the entity based on financial reporting objectives.