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Depreciation Analysis Depreciation analysis is the process of determining the appropriate depreciation rate to assign to an asset It is important to calculate depreciation in order to properly budget for asset purchases, as well as to accurately record expenses for tax purposes. A depreciation analysis can include examining the cost to purchase, install, and maintain the asset over its useful economic life, taking into account its expected salvage value. Depreciation is the process of accounting for an asset's decline in value through use or obsolescence over time. The analysis process is completed to estimate how much of the asset's value should be charged to expense for each period of its economic life. This rate is then applied to the asset's cost basis each period, until the asset has been completely depreciated. By determining the appropriate depreciation rate of an asset, a company can see the real cost of owning and using the asset over time. It also allows companies to accurately record their expenses for tax purposes. The five best examples of depreciation analysis include: 1. Straight Line Depreciation: Straight line depreciation is the simplest and most common method of depreciation. It is calculated by dividing the original cost of the asset by its expected useful life. This method produces a consistent depreciation amount each year and is ideal for assets that have a consistent level of use and value. 2. Accelerated Depreciation: Accelerated depreciation is the most common method for the accelerated recovery of the cost of the asset.It allows for a larger depreciation expense to be claimed in the earlier years and a smaller deduction in the later years. 3. Declining Balance Depreciation: This is a method of accelerated depreciation in which a fixed percentage of the current asset value is depreciated each year. It is best suited for assets that have a declining level of use or rapidly depreciating values, such as certain technology. 4. Sum-of-the-Years-Digits: This method allows for the most depreciation to be claimed in the earlier years of the asset's life and for a declining depreciation cost to be applied in each successive year. This method is suitable for assets that have an expected recovery value that is significantly lower than the original cost. 5. Component Depreciation: This method is used to depreciate assets that have multiple components that have different useful lives. It is important to accurately calculate the depreciation for each component in order to create an accurate financial statement. Overall, depreciation analysis is an essential tool for any company when calculating the cost of an asset over time. It allows companies to accurately budget, record expenses, and properly allocate tax deductions. By understanding the five different depreciation methods, companies can better determine which one best fits their particular asset.