Depreciation is allocation of an asset that can be depreciated over the useful life of the estimated. The useful life of a depreciable asset should be estimated
after considering the following factors; Estimated wear and physical damage (physical wear and tear), Obsolescence, Legal or other restrictions on the use of assets.
Depreciation methods are generally classified on four sections, namely:
1). Average Method
Average method is one way in which the asset in a way depreciation average. This method is divided on 3 parts is, straight-line method, the method of working hours the machine, a method based on production quantities.
Straight Line Method
Straight-line method is properly applied when the expected useful lives of fixed assets are each the same period. Thus, if the straight-line method produces the same amount of depreciation expense each period, there will be a proper comparison between revenues and costs. Due to the expected useful lives of the assets each period the same will generate the same income each period.
Service hours method
This method is based on the assumption that the assets (mainly machinery) will be more easily damaged when used fully (full time). In this way depreciation is calculated on the basis of units of hours services. Periodic depreciation expense amount will depend on the hours of service in use (used).
Product Unit method
Depreciation is calculated based on the number of products result same depreciation method machine hours. The size of the amount of depreciation in each year depends on the number of products produced in each year. Total production in each year depending on market demand and the types of goods produced.
2). Compound interest method
Depreciation is done by using a method based on the compound interest rate prevailing in the community, or often called the opportunity cost of capital (OCC) as the cost of capital. If the level prevailing in the society interest at 18% per year, then the annual depreciation calculation is based on the prevailing interest rate. Depreciation method based the interest compound can be done in two ways, namely
Annuity method is virtually identical to the calculation of annuity based on the value or original cost asetr as present value.
Sinking fund method
methods used by the method sinking funds represent deposits made by the owner of the company on each end of the financial institutions (banks). The size of the deposit is done depends on the size of the asset itself. niali assets, interest rates, and economic life of the asset itself.
3). Loss Method
a. number annualized rate Method
depreciation is the amount of funds that must be spent in each year based on the amount of the annual rate of economic life of the asset.
Depreciation percentage of average method
based on the amount of depreciation depreciation method is the average percentage of the division of the value of assets that are valued in the new state (100%) with the economic life of the asset.
4). Composite depreciation method
That is, if a depreciable more than one, have different useful lives and the purchase price as well as different scarp value, usually in the depreciation calculation is done by a combined method of depreciation.
Reasons companies choose the method of depreciation is to be companies are more concerned with the ease in applying the method of depreciation of fixed assets and has become a firm management decision to implement the method of depreciation of fixed assets. In addition the company is more concerned with the financial statements for attracting investors.
The alternative in indonesia use straight line method because In the straight-line method over looked aspects of time than usability aspects. This method is the most widely adopted by companies as the most easily applied in accounting. In the straight-line depreciation method, depreciation expense for each year of equal value and is not affected by results / outputs are produced.