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What is Depreciation?

Understanding Depreciation is an allocation made systematically to shrink or reduce the amount of an asset over its useful life. These fixed assets are the company’s assets to support operational activities. Every year, there is a depreciation expense for the fixed assets as their use in the company’s operations.

In general, the application of depreciation or depreciation of fixed assets in the company’s finances can affect its financial statements and also changes in corporate income tax. The reduction is often seen as a loss in the calculation of value. Still, an accountant who understands financial statements can view depreciation as a tool for cost allocation.

Types of depreciation

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 reduction as a function of time and not of use function.

The calculation formula is as follows:

    Depreciation Cost = (Asset Cost – Residual Value): (Asset Value)

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

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

Decreasing Charge Method

This method is an accelerated depreciation method that provides higher depreciation costs in the initial year and lower expenses in subsequent periods. The main focus on this method is more depreciation expense in the initial year because the assets decreased in that year.

Activity Method (Unit of Use or Production)

This method assumes depreciation as a function of productivity or use and not in terms of time passing. With the picture above, determining the age of the shrinkage of the production machine does not have a particular problem 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 expense = [(IDR 500 million – IDR 50 million) x 4,000]: 30 thousand = IDR 60 million.

However, this method has limitations because it is not appropriate to use in depreciation situations based on time and not activity.

Special Depreciation Method

In terms of depreciation, it has been explained that the aim is to find out the depreciation of the benefits of company assets. However, in some cases, companies cannot choose one of the depreciation methods above because the assets involved have unique characteristics or require special implementation.

There are two specific methods that you can apply to this case, namely:

Group and combined methods; often used on assets that are quite homogeneous and have almost the same function.

Mixed and combination methods; applied following the wishes of the accountant.

How to calculate depreciation in small business?

How to calculate depreciation by using a rate (percent /%) that always decreases. This rate is multiplied by the agreed price each period.

The tariff reduction for each period is done without using a specific basis but determined based on the approval of the company’s management.

Because the tariff is always decreasing in each period, the burden of depression is continuously decreasing.

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