How to Calculate Depreciation Expense

Depreciation is an important concept to learn as it applies with all the fixed assets in an organization. Under the category of fixed assets, there are buildings, equipments and machinery, furniture, vehicles, etc. When these items are used, the initial value of these assets reduces or depreciates over time. Therefore, in organizational point of view, the reducing amount needs to be included in accounts as an expense. In this article, various methods used in accounting for depreciation in the financial statements are discussed.

Methods of Calculating Depreciation Expense

There are two methods that are most frequently used in accounting to calculate depreciation expense as indicated below:

  • Straight Line Method
  • Reducing Balance Method

Straight Line Method of depreciation

In Straight Line method, the cost is depreciated equally among the useful life of the fixed assets. The following formula for calculating depreciation can be used.

Formula for calculating depreciation | How to calculate depreciation expense | clickspay.ru

Where,

  • Cost represents the initial price or value of the fixed asset.
  • Residual Value refers to the estimated scrap value at the end of the useful life of a fixed asset. 
  • Useful Life is the estimated lifetime of the fixed asset that can be used until the time of the disposal. It can be calculated in the units of years.

 

For example, the purchase cost of the machine is $60,000 and the estimated residual value is $10,000, and the useful life of the asset is five years. The depreciation is calculated based on the straight line method and the following formula for calculating depreciation can be used.

How to calculate depreciation expense | clickspay.ru

The depreciation calculation can be recorded in the balance sheet in the following manner:

How to calculate depreciation expense | clickspay.ru
Double entry for the depreciation can be illustrated as follows :

How to calculate depreciation expense | clickspay.ru
Reducing Balance Method of Depreciation

The depreciation amount is calculated by way of reducing the cost of the asset over time. The depreciation value is calculated using the following formula:

Reducing Balance Method | How to calculate depreciation expense | clickspay.ru

By reducing the accumulated depreciation from the cost of the fixed asset, the Net Book Value (NBV) can be generated. According to this method, depreciation amount is calculated based on the NBV.

For an example, Company X bought a fixed asset with the cost of $2,000 and its residual value is $500. The useful life of the asset is three years and the rate of depreciation is 50%. Here, the depreciation amount is calculated based on the reducing balance method.

How to calculate depreciation expense | clickspay.ru

Reducing Balance Method is suitable for assets which have a higher capacity at the initial stages of life such as computer equipments, machines, etc. It ensures to charge a higher depreciation at the earlier stages of life.

About the Author: Koshal

Leave a Comment


Related pages


micro calipersoughting meaninggram positive bacteria vs gram negative bacteriawhat is the difference between cauliflower and broccoliliterary definition of antithesissources of mono and polyunsaturated fatsenquiries vs inquirycrystalloid and colloid fluidscentrosomes definitionkingdom archaebacteria and eubacteriadefinition of enunciatingassonance poetry definitionenjambamentexample of oxymoron in poetrydifference between plant and animal mitosiswhat is the difference between atheist and agnosticmolasses typeshereditary vs geneticdefinition of passive transportwhat is the difference between monosaccharides disaccharides and polysaccharidesdelusion vs hallucinationpresent value bond calculatorclosed mitosisdefine hypomaniazygote fetusisomers of fructoseboson fermiondefine hallucinationsoogenesis and spermatogenesisdefine evaporation chemistrymonologue defwhat is the difference between a teacher and an educatordefine patient or patienceeminent or imminentwhat is the difference between radiation and irradiationvernier callipers diagramdefinition of stereotype in literaturetransnational firmsdescribe gold foil experimentthe definition of acculturationcystine cysteineadenine definition biology2ca o2amoral definecofactor vs coenzymethermoplastic & thermosetting plasticsstatic friction and kinetic frictionhallucination meansdifference between leucoplast chloroplast and chromoplasttest for iodide ionsmolecular structure of cyclohexanemaltose is reducing sugarmarginal or variable costingtips to memorizing a speechdifference between memoir and autobiographybiannually meanswhat is the difference between an ant and a termiteexamples of euphonydna coding strand to mrnagroup velocity phase velocitydefinition of facetiousderive expression for centripetal accelerationwhat is the difference between nonrenewable and renewable energyexample of intensive pronoun sentencewhy is fractional distillation more effective than simplesoar definitionwhat is the difference between refraction and reflectionapa footnote citationseffector neuronswhat is the difference between countable and uncountable nounsprose vs poetry definitiondistinguish between the nucleus and the nucleolusmoving magnet galvanometerdefinition of multicellulardifference between sodium bicarbonate and baking sodahow do you subtract vectorsdifference between jaguar and black pantherwhat is the difference between cologne and perfumewhat is the difference between a bulldog and a pitbullrelation between angle of repose and angle of friction10 non essential amino acids