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1. • CommentAuthormikevilkin
   • CommentTimeMar 22nd 2008 edited

    
   I'd like to see group and composite depreciation methods added to this site. Let me offer my understanding of the two concepts. I'm still an accounting student.
   
   
   Group method of depreciation
   
   The group method is applied to a collection of assets similar in nature. Depreciation on all assets is determined by using the straight-line-depreciation method. Here is the table.
   
   _Asset___Historical_Cost___Salvage _Value____Depreciable _Cost___ Life___Depreciation _Per_Year
   
   Computers ____$5,500__________$500___________$5,000___________ 5________ $1,000
   
   
   Composite method of depreciation
   
   The composite method is applied to a collection of assets that are not similar, and have different service lives.
   For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on all assets is determined by using the straight-line-depreciation method.
   
   
   Asset___Historical_Cost__ Salvage_Value__Depreciable_Cost___Life__ Depreciation_Per_Year
   ===============================================================================
   Computers ___ $5,500________$500_________$5,000_______ 5.0 years_______ $1,000
   Printers______$1,000________$100__________ $ 900________3.0 years_______ $ 300
   Total________$ 6,500_______ $600__________$5,900_______4.5 years_______ $1,300
   
   Composite Life = $5,900 / $1,300 = 4.5 years.
   Composite Depreciation Rate = $1,300 / $6,500 = 0.2 = 20%
   
   Composite Life equals the total Depreciable Cost divided by the total Depreciation Per Year.
   A composite Depreciation Rate equals Depreciation Per Year divided by total Historical Cost.
   
   In any given year, Depreciation Expense equals the composite Depreciation rate times the balance in the asset account. 0.20 * $6,500 = $1,300.
   Debit Depreciation Expense and credit Accumulated Depreciation. When an asset is sold, debit Cash for the amount received and credit the asset account for its original cost. Debit the difference between the two to Accumulated Depreciation. Under the Composite method no gain or loss is recognized on the sale of an asset .
   
   It should be noted, though, that Depreciation Expense should equal total Depreciation Per Year, or $1,300. To calculate Composite Depreciation Rate we divide Depreciation Per Year by total Historical Cost. After that we multiply the result by the same total Historical Cost in order to calculate Depreciation Expense. The correct result, not surprisingly, will equal to Depreciation Per Year.
   Accounting is not an exact science, and accountants take a full advantage of this fact by inventing tricks of creative accounting. Common sense requires Depreciation Expense to be equal to Depreciation Per Year, without first dividing Depreciation Per Year by total Historical Cost, and than multiplying the result by total Historical Cost in order to arrive to Depreciation Expense.
   --Michael Vilkin