How to Determine Car Depreciation

Depreciation is the accountant's way of measuring the wear and tear on a physical asset. It is not a "real" cost and is referred to by investors as a non-cash expense, however, it can influence the real value of your asset. Cars are assets that depreciate in value according to usage. As such, manufacturers often determine the useful life for a vehicle. If you know the useful life of the car you can determine the depreciation.

Instructions

1. Determine the useful life of the asset. It is hard to determine the useful life of a car. Some last for decades and others break down after only a few years. The best proxy is the number of years on the warranty if the car is new. However, if there's no warranty ask a broker or a car specialist/mechanic for an estimate/appraisal.

2. Determine the cost of the asset. This is the price you paid for the car.

3. Determine the depreciation expense. The formula for computing straight line deprecation is the cost of the asset divided by the useful life. Let's say you purchased a used car for $10,000. The warranty is for five years and the car is three years old.

4. Calculate the depreciation expense for the car. For our example, since the car is three years old the useful life is just two years. The cost of the car is $10,000 so the annual depreciation expense is $10,000/2 or $5,000.

References

• IRS Publication 946: How to Begin Depreciating Your Property

Resources

• Money-zine: Calculator