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Simple English definitions for legal terms
units-of-output depreciation method
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A quick definition of units-of-output depreciation method:
The units-of-output depreciation method is a way to calculate how much an asset has worn down or become obsolete over time. It is useful for figuring out how much of a tax deduction a company can take each year. This method takes into account how much the asset has been used or how many units it has produced, and allocates the cost of the asset over the accounting periods based on that output. This helps companies accurately account for the wear and tear on their assets and plan for their replacement in the future.
A more thorough explanation:
The units-of-output depreciation method is a formula used to estimate the wear, use, or obsolescence of an asset over its useful life. This method is useful in calculating the allowable annual tax deduction for depreciation.
For example, let's say a company purchases a machine for $10,000 and expects it to produce 100,000 units over its useful life. The salvage value of the machine is estimated to be $2,000. Using the units-of-output depreciation method, the company can allocate the cost of the machine over the number of units produced. If the company produces 10,000 units in the first year, the depreciation expense for that year would be:
Depreciation expense = (Cost - Salvage value) x (Units produced / Estimated total units)
Depreciation expense = ($10,000 - $2,000) x (10,000 / 100,000) = $800
The company can continue to use this formula to calculate the depreciation expense for each year based on the number of units produced.
Overall, the units-of-output depreciation method is a useful tool for companies to accurately allocate the cost of an asset over its useful life based on its productivity.