Things You'll Need:
- Invoices
- Spreadsheet program or calculator
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Step 1
Determine the jurisdiction you will be following. It may be U.S. GAAP, U.S. Tax, IFRS or another system of accounting. The particular jurisdiction will affect the method by which you depreciate the asset, and the number of periods you may do so. In the following example, we will be depreciating a swimming pool under U.S. Tax, which has a defined useful life of 39 years. In the example, we will use the straight-line method.
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Step 2
Determine the value of the asset. Depending on the type of asset and the accounting method, there are many ways to do this. If the asset can be easily valued through a third party, that should be used. If the asset is similar in value to another that was recently purchased or sold, that value may be used. In addition, any costs associated with bringing the asset into use, or fees associated with acquiring the asset (such as legal costs or permits), should be included. For the purpose of the example, the cost to bring the swimming pool into service is $1 million.
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Step 3
Estimate the salvage value. This is the value for which the asset can be sold after its useful life. For example, an automobile may be able to be sold to a scrap yard for parts. In practice, salvage values are generally zero.
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Step 4
Determine the asset’s value to be depreciated. This is the value of the asset minus the salvage value, minus any disposal costs. Disposal costs are any charges that may be incurred while selling or getting rid of the asset.
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Step 5
Divide the assets value to be depreciated from Step 4 by its useful life. In the above example, it is $1 million divided by 39, which is $25,641. Then take the quotient and divide it by 2; this is the first and last year's depreciation expense. This is known as the half-year convention, and is used so that the date the asset is put in service is not questioned. In the example, the half-year convention depreciation expense is $12,821.
