Definition of Depreciation

This time we will discuss the meaning of depreciation along with methods and examples. Here’s the explanation …

 

Table of contents :

Definition of Depreciation

According to Kleso, Weygant and Warfield

According to Zaki Baridwan

According to the Statement of Financial Accounting Standards (PSAK)

Depreciation Method in Business Accounting

  1. Straight-Line Method (Straight-Line Method)
  2. Decreasing Charge Method
  3. Activity Method (Unit of Use or Production)
  4. Special Depreciation Method

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Definition of Depreciation

Depreciation is an allocation that is made systematically to shrink or reduce the amount of an asset over its useful life.

 

Fixed assets are company assets to support operational activities. Each year, depreciation expense is incurred for fixed assets used in the company’s operations.

 

In general, the application of depreciation or depreciation of fixed assets to the company’s finances can affect its financial statements and also changes in corporate income tax.

 

Depreciation is often viewed as a loss in computed value, but an accountant who understands financial statements may view depreciation as a tool for cost allocation.

 

In order to better understand, we present some definitions of depreciation according to experts as follows:

 

According to Kleso, Weygant and Warfield

Depreciation is the accounting process for allocating the cost of tangible assets into systematic and national costs against the period expected to benefit from the use of these assets.

 

According to Zaki Baridwan

Depreciation is a part of the cost of property, plant and equipment that is allocated systematically to the cost of the accounting period.

 

According to the Statement of Financial Accounting Standards (PSAK)

Depreciation is the allocation of the amount of depreciable assets over the estimated useful life. Depreciation for the accounting period is charged directly or indirectly to income.

 

Depreciation Method in Business Accounting

In companies there are several depreciation methods that are commonly used. In accordance with the definition of depreciation above, which requires accountants to use a rational and systematic depreciation method.

 

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For example, in a case study, your company wants to buy a new production machine for a specific purpose, it could be explained as follows:

 

New Production Machine Cost = IDR 500 million

Estimated Benefit Time = 5 years

Estimated Time Value = IDR 50 million

Productive Age = 30 thousand hours

From this description, there are several depreciation methods you can use to calculate your company’s financial depreciation expense, including:

 

  1. Straight-Line Method (Straight-Line Method)

This method is also called the Straight-Line Method and is the method most often used to calculate depreciation expense.

 

This method focuses on depreciation as a function of time and not a function of usage.

 

The calculation formula is as follows:

 

Depreciation Cost = (Asset Cost – Residual Value): (Period / Benefit Period)

Depreciation expense = (IDR 500 million – IDR 50 million): 5 = IDR 90 million

However, the use of this method is considered less realistic because of the use of the same assets every year.

 

  1. Decreasing Charge Method

This method is an accelerated depreciation method that provides a higher depreciation expense in the initial year and a lower cost in subsequent periods.

 

The main focus of this method is more depreciation expense at the beginning of the year as assets decline during the year.

 

This method is divided into two parts, namely

 

  1. Total Year Number Method

 

Depreciation calculation uses a fraction with a one-year numerator (5 + 4 + 3 + 2 + 1 = 15) and the number of years being the denominator.

 

In this method, the numerator decreases from year to year and the denominator is fixed (5/15, 4/15, 3/15, 2/15, and 1/15). Here’s an illustration:

 

depreciation method

 

  1. Decreasing Balance Method

 

The declining balance method uses depreciation expense (as a percentage) in double the straight-line method.

 

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For example, the multiple declining balance rate for a 10-year asset would be 20% (twice the straight-line cost, which is 1/10 or 10%). Here’s an illustration:

 

depreciation method

 

  1. Activity Method (Unit of Use or Production)

This method assumes depreciation as a function of productivity or use and not in terms of the passage of time.

 

With the description above, determining the shrinkage age of a production machine does not have certain problems because its use is relatively easy to measure.

 

Suppose the production machine is used 4,000 hours in the first year, then the depreciation expense can be calculated as follows:

 

Depreciation cost = [(Rp. 500 million – Rp. 50 million) x 4,000]: 30 thousand = Rp. 60 million.

 

However, this method has limitations because it is not suitable for use in situations of time-based rather than activity depreciation.

 

  1. Special Depreciation Method

In terms of depreciation, it has been explained that the objective is to determine the depreciation of the benefits of the company’s assets.

 

But for some individuals, companies cannot choose one of the above depreciation methods because the assets involved have unique characteristics or require special applications.

 

There are two specific methods you can apply in these cases, namely:

 

The group and combination method – is often used with fairly homogeneous assets and has almost the same function.

Mixed and combined methods –  often applied to the preferences of accountants.

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