Final answer:
Commonly used depreciation methods include Straight Line, Declining Balance, and Activity Based Depreciation, each of which allocates the cost of a tangible asset over its useful life differently.
Step-by-step explanation:
There are several commonly used depreciation methods in accounting to allocate the cost of a tangible asset over its useful life. The main methods are:
- Straight Line Depreciation: This method spreads the cost of the asset evenly across its useful life. It is calculated by taking the purchase price or acquisition cost of an asset minus any salvage value, then dividing by the total number of years it is expected to be used.
- Declining Balance Depreciation: A form of accelerated depreciation. It applies a fixed-rate to the book value of the asset at the start of each year. Commonly, double-declining balance is used, which means it depreciates at double the normal rate.
- Activity Based Depreciation: With this method, depreciation is determined by the actual usage, activity, or production levels rather than the passage of time. It may also be known as units of production depreciation.
Each method has different implications for profit reporting and tax obligations; businesses choose the one that best matches the use and wear of the asset, along with their financial strategies. Methods not typically used or less common include value-based depreciation, which is not a standard accounting term.