Shipping costs are used to calculate depreciation.
Under generally accepted accounting principles (GAAP), there are four ways to account for asset depreciation, each considering different factors. The GAAP straight-line (SL) depreciation method primarily considers the useful life and cost of the asset. With the GAAP Unit of Production (UOP) depreciation method, the production number and costs are the primary factors. Declining Balance (DB) is primarily used with equipment and assets that are certain to decrease in value over the years. In the sum of the year’s digits (SYD) method, the asset’s working years are the deciding factor.
One of the most common GAAP depreciation methods is the SL method. The accountant must know the asset’s depreciable basis, which is cost less value. This amount is then divided by the number of years the asset is expected to live. Unlike most other methods where the depreciation will be different each year, the SL method has the same depreciation. Assets that have an easily discovered depreciable basis, but do not have a defined life, work best with this method.
While many factors are considered with the UOP GAAP depreciation method, this method is easy to use once the factors are known. When something is made or used, there are many factors that cause the asset to depreciate. For example, if a product is manufactured, other costs must be considered, including the number manufactured, the cost of exporting or transporting, the wear and tear on equipment, and the human resource hours required to manufacture the product. All of these factors add up and this leads to the amount of depreciation.
A GAAP depreciation method similar to SL is the DB method. To find out the database, the accountant must first execute the SL method. The value there is then multiplied by 150, 200, or 250 percent, depending on the estimated depreciation. The depreciation percentage is then multiplied by the beginning value of the asset to find its depreciation.
In the SYD GAAP depreciation method, it is important to know exactly how long the asset will be useful. Once this is known, the years are added. For example, if the asset is useful for three years, the accountant adds 1, 2, and 3 to get 6. These numbers are then converted to fractions in descending order, which are multiplied by the value of the asset. This means that for the first year the asset is multiplied by 3/6, so the next year it is 2/6 and the third year it is multiplied by 1/6.