Linear and declining balance depreciation

Fixed assets such as machinery, vehicles, furniture, or computer systems, which are used over several years, are activated in the balance sheet upon purchase. Over time, the value of these assets decreases. The depreciation on tangible assets is recorded as an expense through depreciation. There are two different methods to depreciate an asset: straight-line and declining balance.

Straight-Line Depreciation

In straight-line depreciation, the asset is depreciated by the same amount each year. The acquisition cost is divided by the expected useful life, and the resulting amount is depreciated.

An example:

We purchase a machine for CHF 10,000. We assume that this machine will be used for 5 years. Thus, we divide CHF 10,000 by a lifespan of 5 years and get CHF 2,000. We therefore depreciate the machine annually by CHF 2,000, so that after five years it has a book value of 0.

Declining Balance Depreciation

In declining balance depreciation, a percentage of the remaining book value is depreciated each year. Thus, the depreciations decrease annually until the total residual value is depreciated by the end of the useful life.

An example:

We purchase a vehicle for CHF 50,000 and plan to use it for 5 years. We decide to depreciate the vehicle using a declining balance rate of 40% (40% of 50,000 = 20,000). The vehicle thus has a remaining book value of CHF 30,000 after the first year (50,000 - 20,000 = 30,000). In the following year, another 40% of the 30,000 is depreciated, i.e., CHF 12,000, resulting in a remaining book value of CHF 18,000.

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