How to Calculate Depreciation

This article will explain how to calculate depreciation for your assets.

Difficulty: Easy

Instructions

Things You'll Need:

• Calculator
• Paper
• Pencil

1. We will look at two of the four ways to depreciate a tangible long-term asset. The two ways will be Straight Line method and Units of Production method.

2. Straight Line depreciation is the most simple and easiest way to depreciate an asset. The formula for SL depreciation is:
   
   Cost - Salvage Value / Estimated Useful Life; (/)means divided by.

3. Now, back to the terms. Cost is basically what the retail price was that you bought the asset for.
   
   Salvage Value is the estimated scrap or market value of the asset at the disposal date.
   
   Est. Useful Life is the time that you expect the asset to provide you a service for.

4. One more term to learn is Book Value or the undepreciated cost of the asset. Book Value formula is:
   
   Cost - Accumulated Depreciation

5. Okay, now let's plug in numbers. Cost= 10,000 SV= 1,000 and EUL= 4 years or 90,000 units (for units of production method when we get there). So, our formula is C-SV/EUL.

6. We plug in the numbers and we get 10,000-1,000/4 = 9,000/4 or 2,250 annual depreciation. So, what about book value? Well, accumulated depreciation for the first year is going to be 2,250. This is because it is only the first year so the accumulated depreciation is going to equal annual depreciation.

7. 
    
   What is the value of your asset after depreciation?

   Back to book value. 10,000-2,250 = 7,750 book value or undepreciated cost of the asset. What about year 2? Well, depreciable cost is still 2,250 so your accumulated depreciation for the 2nd year is 2,250 + 2,250 or 4,500. Then your book value is 10,000 - 4,500 = 5,500. This is the same for year 3 and year 4. Go ahead and try them on your own.

8. For Units of Production method the units have to be known. There are 2 steps in this method. First you must find out the depreciation per unit by: C-SV/EUL in units. So, 10,000-1,000/90,000 units from our information above. This will give you $0.10 per unit.

9. 
    
   The company car.

   Step 2 in this method is to find the annual depreciation. So, annual depreciation = depreciation per unit x number of units produced or consumed this year. Let's say we had a company car, and this year we put 24,000 miles on this car. The first year depreciation is calculated by taking 24,000 miles x 0.10 per mile = $2,400 of depreciation on the car for that year.

10. I hope this tutorial has helped some of you with depreciation. We could go into the other two methods which are Sum of the Years and Double Declining Balance, but Sum of the Years is obsolete and Double declining is sort of difficult.

Tips & Warnings

• An asset purchased before or on the 15th of the month is considered to have been owned for the full month.
• PRACTICE, PRACTICE, PRACTICE.
• The more you do this stuff the better you will get and be able to remember the formulas easier.
• Be very careful when dealing with depreciation. One small mistake and you could be going back for hours trying to figure out why it did not balance at the end!!

Resources

• Accounting Coach

[cyclon98]

on 10/9/2009 Great, but as far as I know salvage value(remaining value)doesn't necessariliy the same with the market value as you decribed in step3. Some books say it's a commmon mistake to think of the salvage value as a market value since depreciation is a process of cost allocation, not a process of determining an asset's current market value or worth. What do you think?

[amylaine]

on 3/18/2008 Great info, thanks.