How to Recognize Depreciation

Depreciation is the way accountants account for the wear and tear on assets. Assets can be inventory, real estate, equipment or any tangible asset that loses value over time due to use. There are several types of depreciation; however, the most common methodology used is referred to as straight-line depreciation. This calculation is used to determine the annual deprecation expense. The annual depreciation expense is deducted from the original cost of the asset over the life of the asset until the final value of the asset is $0.

Instructions

1. Obtain the cost of the asset. This is the amount or price paid for the asset. You can use a receipt to verify this amount. For instance, if you purchased a $10,000 tractor for $8,000, the cost of the asset used to calculate depreciation is $8,000.

2. Determine the useful life of the asset. This depends on the length of time the asset brings value to the business. Some assets have a useful life of six months, whereas others have a useful life of 20 years. For this example, let's say the the useful life of the tractor is five years.

3. Determine the scrap or salvage value of the asset. This is the value of the asset after it is no longer useful to the company. For instance, the tractor may break down, but the scrap value of the tractor's components may have value. Let's say the tractor's components are valued at $500.

4. Subtract the salvage value of the asset from the cost of the asset. The calculation is $10,000 - $500 or $9,500.

5. Divide the answer in Step 4 by the useful life of the asset. The calculation is $9,500 divided by 5 or $1,900.

6. Recognize depreciation as an annual expense on the income statement. Every year, deduct the depreciation expense from cost of the asset until the value of the asset is written off to the salvage value or $0, whichever is higher.

References

• Assetaide.com: Depreciation