4 Simple Ways To Calculating Depreciation
Depreciation represents how much of an asset’s value has been used up.
Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use.
An Example – If a delivery van is purchased by a company with a cost of #200,000 and the expected usage of the van is 5 years, the business might depreciate the asset under depreciation expense as #40,000 every year for a period of 5 years.
Methods Of Depreciation
1. Straight-Line Method: This is the simplest method of all. It involves simple allocation of an even rate of depreciation every year over the useful life of the asset.
The formula for straight line depreciation is:
Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset
2. Sum-of-the-Years-Digits Method
Some businesses, though, prefer an accelerated depreciation method that means paying higher expenses early on and diminishes over time.
This may be to their advantage in tax season as they would have a low net income in the first year but make up their loss in taxes later on.
The formula for the sum-of-the-years-digits method:
Depreciation Expense = (Remaining life / Sum of the years digits) x (Cost – Salvage value)
3. Double Declining Method
Compared to other depreciation methods, double-declining-balance depreciation results in a larger amount expensed in the earlier years as opposed to the later years of an asset’s useful life. The method states the fact that assets are typically more productive in their early years than in their later years.
The formular for double-declining balance method:
Periodic Depreciation Expense = Beginning book value x Rate of depreciation
4. Units of Production
This method requires an estimate for the total units an asset will produce over its useful life. Depreciation expense is then calculated per year based on the number of units produced. This method also calculates depreciation expenses based on the depreciable amount.
This is a two-step process, unlike straight line method. Here, equal expense rates are assigned to each unit produced. This assignment makes the method very useful in assembly for production lines.
The formular for Units of Production:
Annual Depreciation=Depreciable Value×Units produced during the yearEstimated total production
Depreciable Value = Original cost – Scrap value
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