How to Account for Depreciation
Straight-line depreciation is the easiest way to spread the costs of assets that lose value over a period of time. A depreciating asset is referred to as a non-cash expense. The matching principle of depreciation is used to make justifiable purchasing decisions. For example, if you purchased a printing press, you want it to earn at least the annual non-cash expense of depreciation set for each year. You can validate your purchases of business equipment and other related assets in just a few easy steps.
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Instructions
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1
Determine the depreciation cost of an asset. Subtract the salvage (resale) value from the end of the useful lifecycle of the asset. For example, say you decide to purchase a laptop and place it in service for five years. You determine that after five years of service, the resale value of the laptop will be $100. Subtract this amount from the original cost of the the laptop to get the entire depreciation cost.
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2
Divide the depreciation cost by the number of years the asset will be placed in service to get the annual depreciation expense.
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3
Divide the annual depreciation expense by 12 to get the monthly depreciation expense.
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4
Calculate the asset's depreciation expense for the first and last year of service. Multiply the monthly depreciation expense by the number of months remaining in the year. For example, if the asset was purchased on July 1, multiply the monthly depreciation expense by six months. The calculation is based on an accounting year ending on Dec. 31. The last year of depreciation will also be a partial year.
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5
Repeat Steps 1 through 4 for each asset you want to depreciate.
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Tips & Warnings
Land is not considered a depreciable asset; it does not ordinarily lose value over a period of time.
The IRS regulations and supporting code for depreciation differ from general ledger accounting depreciation as explained in these steps. Visit the IRS website and review publications prior to determining depreciation for income tax purposes.
