gen-briefly-explain-depreciation-methods-and-one-common-misconce-37c1

Briefly explain depreciation methods and one common misconception about it.

# Depreciation Methods **Main depreciation methods:** 1. **Straight-line** - Equal expense each year (most common) - Cost ÷ useful life = annual depreciation 2. **Declining balance** - Higher expense in early years, decreasing over time - Applies a fixed percentage to the remaining book value 3. **Units of production** - Based on actual usage/output - Depreciation varies with production levels 4. **Sum-of-years-digits** - Accelerated method using a fraction that decreases annually ## Common Misconception **"Depreciation sets aside cash for replacing assets"** This is false. Depreciation is purely an **accounting allocation** of an asset's cost over its useful life—it's a non-cash expense. No money is actually being saved or set aside. When you record depreciation expense, you're simply recognizing that an asset's value has declined, but your bank account doesn't change. If a company wants funds available for replacement, they must make a separate, intentional decision to save cash—depreciation doesn't do this automatically.