Explain how to compute depreciation, including a definition of both kinds of depreciation in your answer.

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Depreciation is the decrease in property value and the reduction in the balance sheet value of a company asset to reflect its loss of value through age and wear and tear. The U.S. Internal Revenue Service states that the life of office equipment for depreciation purposes is five years. The two common ways of computing depreciation are the straight-line method and the double-declining balance method. The simplest and most common, straight-line depreciation, is calculated by dividing the purchase or acquisition price of an asset by the total productive years the asset can reasonably be expected to benefit the company, which is called the life of the asset. In the chapter project, each asset in the inventory file has a life of five years. The double-declining balance depreciation method is like the straight-line method doubled. With this method, the price is doubled and divided by the life in years of the item. After that asset is depreciated the first year, subtract the depreciation amount from the initial price for each subsequent year. The resulting value after subtracting the depreciation is used in the formula for each subsequent year.