How to Increase Depreciation
Depreciation occurs when an asset, such as equipment, decreases in value over time. The depreciation expense is spread over the useful life of the equipment. There are different methods for calculating depreciation. The method chosen will determine how fast depreciation builds or accumulates. Some methods allow depreciation to accumulate evenly over the useful life of the asset while other methods allow depreciation to accrue faster in the earlier years. Companies use different methods to adjust their profit and income for various accounting cycles or periods.
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Instructions
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Calculate how depreciation increases or accumulates using the straight-line method. For example, if you have equipment which costs $50,000 and has an expected useful life of three years, you can show an increase in depreciation during that time frame. The company expects the equipment to be valued at $10,000 at the end of the third year. This value is also called the salvage value.
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Determine the increase in depreciation using the straight-line method. Take the cost of the equipment ($50,000) and subtract the salvage value ($10,000). Divide the remaining total of $40,000 by the number of useful years: $40,000 / 3 = $13,333.
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Calculate the accumulated depreciation. After the first year, the depreciation expense is $13,333; and after the second year, the accumulated depreciation will increase to $26,666. At the end of the third year, depreciation will have increased to $40,000, ($39,999 rounded up). The value of the equipment will be $10,000 at that point.
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4
Find the depreciation expense using the sum of the years' digits method. The sum of the years' digits uses the sum of the useful life of the equipment: 3 + 2 + 1 = 6. Subtract the salvage value from the purchase price: $50,000 - $10,000 = $40,000. Depreciation would be $20,000 for the first year (3 / 6 x $40,000); for the second year, depreciation would be $13,333 (2 / 6 x $40,000); and the third year would yield a figure of $6,666 for depreciation (1 / 6 x $40,000). Depreciation still increases or accumulates using this method, but the increase is less each year.
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Tips & Warnings
The three methods for determining depreciation are straight-line, sum of the years' digits and double declining balance.
The double declining method for depreciation doubles the straight-line rate of depreciation for each year of useful life.
The sum of the years' digits method increases depreciation faster in the earlier years of the equipment's useful life.
The amount of depreciation will be the same at the end of the useful life of the equipment, no matter which method is used.
