Depreciation is the decline in an asset’s value due to both internal and external causes. In accounting, depreciation also refers to the procedure used to represent this phenomenon on the accounts. In each time period of the asset’s useful lifespan, a portion of its value is deducted as depreciation expense in order to represent that it is losing value due to its usage. The amount of depreciation expense deducted in a period depends on the depreciation method used, the useful lifespan of the asset and the value of the asset.
Depreciation is recorded in each period because the Matching Principle in accounting requires costs to be recorded in the same time periods as the benefits that their occurrences helped produce. Since assets depreciate due to usage, that loss is recorded in the periods of their usage as depreciate expense. Accountants perform depreciation only on long-term assets with material existence, meaning that the assets are physical objects that are meant to last for longer than one year. Mobile homes qualify as both and are depreciated using the same means as other assets.
An asset’s depreciation expense per period depends on a number of factors. Among the most important are its book value, its useful lifespan and its residual value upon disposal. Book value, which is sometimes the same as fair market price, is most often the asset’s purchase cost. Useful lifespan is how long it is expected to remain useful in its intended function. Residual value upon disposal is how much it is expected to be sold for as scrap once it becomes useless.
Both useful lifespan and residual value are estimated by looking at the condition of similar assets being sold used on the open market. For example, if a mobile home of the same model is being sold on the market as scrap after 20 years’ use for $10,000, then a new model can be assumed to have useful lifespan of 20 years and a residual value of $10,000 upon disposal. Most mobile homes have lifespans ranging from 15 to 35 years, and their book values can simply be calculated as whatever price they were purchased at.
The straight-line method is the simplest depreciation method and thus one of the most popular. It first calculates the asset’s total depreciable value as being its book value minus its residual value upon disposal. The straight-line method then divides the asset’s depreciable value by the number of time periods in its useful lifespan to come up with depreciation expense per period. For example, if a mobile home is calculated to have $80,000 in depreciable value and has a useful lifespan of 20 years, it will be depreciated $4,000 in each year of its use. In comparison, a mobile home with a longer useful lifespan of 40 years and the same depreciable value would be depreciated $2,000 each year.
Declining-balance method calculates the asset’s total depreciable value using the same equation as a straight-line method. It then calculates depreciation per period as a set percentage of the asset’s remaining depreciable value. For example, if a mobile home is depreciated using a 20 percent depreciation rate, has a lifespan of 20 years and a depreciable value of $80,000, its depreciation expense would be $16,000 in the first year, $12,800 in the second year, $10,240 in the third year, and so on. In the very last time period of the mobile home’s useful lifespan, the depreciation expense for the period would simply be equal to its entire remaining depreciable value. Different users use different rates depending on their needs and desires.