Monday, October 31, 2011

How to Calculate Depreciation

How To Calculate Depreciation | Law School Federal Income Taxation 

Depreciation expense is calculated utilizing either a straight line depreciation method or an accelerated depreciation method. The straight line method calculates depreciation by spreading the cost evenly over the life of the fixed asset. Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset.
The required variables for calculating depreciation are the cost and the expected life of the fixed asset. Salvage value may also be considered. Examples of depreciation calculations for both straight line and accelerated methods are provided below.

Straight Line Depreciation Method

The straight line depreciation method divides the cost by the life.

SL = Cost / Life

Example: A desk is purchased for $487.65. The expected life is 5 years. Calculate the annual depreciation as follows:
487.65 / 5 = 97.53
Each year for 5 years $97.53 would be expensed.

Declining Balance Depreciation Method

The declining balance depreciation method uses the depreciable basis of an asset multiplied by a factor based on the life of the asset. The depreciable basis of the asset is the book value of the fixed asset -- cost less accumulated depreciation.
The factor is the percentage of the asset that would be depreciated each year under straight line depreciation times the accelerator. For example, an asset with a four year life would have 25% of the cost depreciated each year. Using double declining balance or 200%, which is the most common, would mean that depreciation expense in the first year would be twice that or 50%. So to calculate the depreciation expense each year the depreciable basis would be multiplied by 50%.
Example: A copy machine is purchased for $3,217.89. The expected life is 4 years. Using double declining balance the depreciation would be calculated as follows:
factor = 2 * (1/4) = 0.50

13,217.893,217.89 * 0.51,608.951,608.94
21,608.941,608.94 * 0.5804.472,413.41
3804.48804.48 * 0.5402.242,815.65
4402.24402.24 * 0.5201.123,016.77

Sum of the Years Digits

The first step is to sum the digits or numbers starting with the life and going back to one. For example, an asset with a life of 5 would have a sum of digits as follows: 5+ 4+ 3 +2 + 1 = 15
To find the percentage for each year divide the year's digit by the sum. In the example above the percentage would be calculated as follows:

Year 15 / 15 = 33.34%
Year 24 / 15 = 26.67%
Year 33 / 15 = 20 %
Year 42 / 15 = 13.33 %
Year 51/ 15 = 6.67%
Example: A conference table is purchase for 1,467.89. The expected life is 5 years. Since this is a 5 year asset the yearly factors have been calculated above.
11,467.89 * 33.34 %489.40
21,467.89 * 26.67 %391.49
31,467.89 * 20 %293.58
41,467.89 * 13.33 %195.67
51,467.89 * 6.67 %97.91

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