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Depreciation is the cost of the asset for a particular period that has been used to generate revenue. Generally, fixed assets are costly and come under capital expenditure. But this cost is spread over the useful life of the asset for providing benefits. When this spread cost is matched with the revenue it is called depreciation expense.

There are generally three main methods of providing depreciation –

1) Straight Line method -Under this method, depreciation is charged by spreading the cost of the assets evenly through the estimated life of the assets. Depreciation is computed by –

$\mathrm{Depreciation}=\frac{\mathrm{Cost}-\mathrm{Residual}\mathrm{value}}{\mathrm{Useful}\mathrm{life}}$

2) Units-of-production method – Under this method depreciation is charged based on the assets’ usage or production volume. Depreciation is computed by –

$\mathrm{Depreciation}=\frac{\mathrm{Cost}-\mathrm{Residual}\mathrm{value}}{\mathrm{Useful}\mathrm{life}\mathrm{in}\mathrm{units}}×\mathrm{No}.\mathrm{of}\mathrm{units}\mathrm{used}$

3) Double declining balance method – Thismethod is the same as the straight-line method with the only difference that the rate is doubled as compared to the straight-line method. Depreciation is computed by -

$\mathrm{Depreciation}=\frac{\mathrm{Cost}-\mathrm{Residual}\mathrm{value}}{\mathrm{Useful}\mathrm{life}}×2$