How to Master Depreciation
Depreciation is a noncash expense. It is used as a way to write off the value of used assets over time as well as a way to adjust net income downward for tax purposes. The method of depreciation depends on the type of asset being used and the rate of usage for that tax year. If an asset is used more in the beginning of its useful life, accountants will use an accelerated form of depreciation. In order to master depreciation, you have to be able to calculate it with ease.
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Instructions
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Obtain the original purchase price of the asset. This is the amount paid for the asset and not the current market value of the asset. For this example, assume the purchase price of the piece of equipment is $1,000.
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Request an estimate of the useful life from the seller or broker. The useful life of an asset is the number of years it will be able to provide value to the company. The best person to provide this estimate is a local dealer, manufacturer, or even the person that sold you the equipment. Assume the useful life of this example is 10 years.
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Estimate the salvage value. This is the value of the equipment at the end of its useful life. Again, ask the broker or a local scrap yard for help on this. Assume the salvage value of this example is $100.
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Calculate the depreciation expense. Subtract the salvage value from the cost of the equipment and divide by the number of years of useful life. The answer for this example is $1,000 minus $100 divided by 10, which equals $90.
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Calculate accelerated depreciation expense. If the equipment will be used more in the beginning of its useful life than the end, multiply the depreciation expense by two in the first two years of the asset's life. In this example $180 is written off in the first two years of the asset's useful life, and the remainder is written off at the normal rate until it is fully written off.
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