There are two categories of methods of calculating the depreciation of assets. These groups are referred to as time factor methods of depreciation and use factor methods of depreciation. Both groups of methods differ from each other in many ways. These differences are discussed in the following.
Time factor methods are based on the allocation of costs over a period of the estimated economic life of the asset. The use of an asset over the period determines the proportion of cost allocated to a specific period. There are different methods that can be used for the allocation of costs under this category. These methods include the straight-line method, accelerated method, sum of the years’ digits, and declining balance depreciation. All these methods are used depending on the nature of the asset and expected economic benefits arising from the use of these assets. The most commonly used method is the straight-line method which allows a constant amount of depreciation to be charged against the income; however, it is clear that such methods are insensitive to the changes in business activity and net income. In order to overcome this problem, another category of depreciation methods that is use factor is applicable. These methods are based on determining the estimated useful life derived from the expected use of the asset. For example, machinery used can be determined by the number of hours this can operate without having a need for replacement. This means it is possible to allocate the cost of machinery on the number of estimated machinery hours. This category includes depreciation methods such as service-hours depreciation, productive-output depreciation, and evaluation of use-factor.