How to Depreciate Computers
Depreciation is a technique used to reflect the financial loss that a business suffers through an asset's losing value over time. This is done by determining in advance the total loss of value and a time period over which to account for the loss. Company accounts for tax purposes must follow IRS rules about depreciation methods for particular types of assets, including computers.
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Instructions
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1
Calculate the expected value of the computer when it will no longer be of use to the business. This can be zero or the cost you would reasonably expect to receive by selling the used computer. This is known as the scrap value.
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2
Deduct the scrap value from the price you paid for the computer. This represents the total value to be depreciated. Divide this number by five and make a note of the result as the "single line value."
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3
At the end of the first year after buying the computer, calculate 40 percent of the original value. This amount is the depreciation for the year and is listed on the income statement as an expense.
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4
Deduct the depreciation for the year from the computer's original value. The result is the revised value of the computer as an asset on the balance sheet.
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5
At the end of the second year, calculate 40 percent of the computer's revised value. This again gives the year's depreciation expense, as well as allowing you to again revise down the value of the computer.
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6
Repeat this for the third and fourth years. However, if the 40 percent calculation produces a figure lower than the "straight line value", use the straight line value as the depreciation expense and the reduction to the computer's value.
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In the fifth year, the depreciation expense is whatever is necessary to reduce the computer to the scrap value. This is the final year in which you calculate depreciation.
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Tips & Warnings
This method is known as 200% declining balance. This means more of the effect of the depreciation is accounted for in the early years. This represents the fact that computers lose value relatively quickly.
The five-year depreciation period and the 200% declining balance method are mandatory for tax accounts. This applies even if you believe the computer will be obsolete before this time.
