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Depreciation is both the decline in an asset's value and the accounting procedure used to represent this phenomenon on the accounts. In accounting, depreciable assets have a portion of their value deducted due to usage. Only long-term assets with material existence like double wides depreciate. The number of times that an asset depreciates depends on its useful lifespan; the speed in which the depreciation occurs depends on the depreciation method.
Most depreciation methods require the asset's book value, useful lifespan and residual value upon disposal. Book value is the asset's fair value, which is most often the same as its purchase price. Useful lifespan is the estimated length of time that the asset will remain useful and determines the number of times the asset will depreciate. Residual value upon disposal is the asset's estimated remaining value upon it becoming useless and sold as scrap. You can estimate both the useful lifespan and residual value by examining the details of similar assets sold used on the open market.
Different assets depreciate using different depreciation methods and yield different patterns of value loss. For example, one mobile home might last for 15 years while a sturdier model might last for 20 years, but the owner of the first might conduct regular maintenance that extends the asset's useful lifespan to 25 years. In general though, mobile homes bear useful lifespans that more closely resemble those of motor vehicles -- usually 10 to 20 years -- as opposed to houses, which tend to last significantly longer.
Straight-line method is one of the simplest and thus most commonly used depreciation methods. It calculates an asset's depreciable value as its book value minus its estimated residual value upon disposal. Straight-line method then allocates an equal portion of the asset's depreciable value to each of its periods of use as depreciation expense. For example, if a double wide had 20 years of use and $80,000 in depreciable value, straight-line method would depreciate the double wide by $4,000 in each year of its usage. Straight-line method creates an even pace of depreciation that lasts throughout the asset's useful lifespan.
Declining-balance method is another common depreciation method. It calculates an asset's depreciable value using the same equation as straight-line method and then calculates periodic depreciation value as a set percentage of the asset's remaining depreciable value. For example, if you are using a double wide that has a useful lifespan of 10 years, a depreciable value of $100,000 and a 10 percent rate of depreciation, declining-balance method would depreciate it for $10,000 in the first year, $9,000 in the second, $8,100 in the third and so on. Declining-balance method sets a fast pace for depreciation that tapers off as time passes and is perhaps more accurate when portraying the true pattern of value loss for mobile homes.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.