 Depreciation is the process of allocating and spreading the cost of an asset over its functional life. With time, the value of the asset will decrease due to usage, depletion, and obsolesce. The process is usually for the businesses to take an estimate of their tax depreciation and cost optimization.

Here’s a detailed insight on how to calculate depreciation of all the asset owned by you individually or your company

1. Straight Line depreciation method:

You can calculate the straight-line depreciation by subtracting the asset’s scrap value from the original price and then dividing it by the number of years in which it will be useful for the firm. The straight-line depreciation method results in identical depreciation expenses spread evenly throughout a fixed asset’s useful life.

The Formula for Straight-line depreciation:

Depreciation expense = (Cost- Scrap value)/ Useful life

Example:

A firm has bought a transportation truck for \$45,000 to use it. The firm plans to use the truck for five years and expects to sell it for \$1.000 after five years.

What will be the depreciation expense of each year using this method?

Solution:

1st Year (45000-1000)/5 = 8,800

2nd Year (45000-1000)/5 = 8,800

3rd Year (45000-1000)/5 = 8,800

4th Year (45000-1000)/5 = 8,800

5th Year (45000-1000)/5 = 8,800

• Reducing balance depreciation method:

This method is also known as “accelerated” depreciation because it changes the amount of depreciation charged with time.

The methods work magically for the assets that typically lose most of their value in the initial years but undergo a slow process later.

The Formula for reducing balance method:

Depreciation expense= Net book value *Depreciation price

Example:

A firm has bought electrical equipment for \$25,000 for the production process. The expected life of the equipment is five years with a residual value of \$3000.

The firm estimates that the equipment must be depreciated at the rate of 35% annually.

Net book value after 5 years= 25,000- 22,099= 2,901

• Sum of year’s digit depreciation method:

The sum of the year’s digit method is also known as the “accelerated depreciation” method. This method is determined by adding the total number of years of the asset’s expected life and then sorting out the year in which it presently falls on that scale.

The Formula for sum of year’s digit method:

Depreciation expense= remaining life of asset/sum of year’s digit x (Fixed asset price-residual value).

Example:

A firm has bought a digging machine for \$40.000 for their purpose. The life of the machine is expected five years with a residual value of \$1,000.

Calculate the depreciation expense for each year using this method.

Solution: