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.
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.
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
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:
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.
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
| Year | Depreciable Basis | Depreciation Calculation | Depreciation Expense | Accumulated Depreciation |
|---|---|---|---|---|
| 1 | 3,217.89 | 3,217.89 * 0.5 | 1,608.95 | 1,608.94 |
| 2 | 1,608.94 | 1,608.94 * 0.5 | 804.47 | 2,413.41 |
| 3 | 804.48 | 804.48 * 0.5 | 402.24 | 2,815.65 |
| 4 | 402.24 | 402.24 * 0.5 | 201.12 | 3,016.77 |
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 = 15To 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 1 | 5 / 15 = 33.34% |
| Year 2 | 4 / 15 = 26.67% |
| Year 3 | 3 / 15 = 20 % |
| Year 4 | 2 / 15 = 13.33 % |
| Year 5 | 1/ 15 = 6.67% |
| Year | Depreciation Calculation | Depreciation Expense |
|---|---|---|
| 1 | 1,467.89 * 33.34 % | 489.40 |
| 2 | 1,467.89 * 26.67 % | 391.49 |
| 3 | 1,467.89 * 20 % | 293.58 |
| 4 | 1,467.89 * 13.33 % | 195.67 |
| 5 | 1,467.89 * 6.67 % | 97.91 |
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Checking out our amazing store on Etsy: http://www.bohobuttons.com
While in law school I traveled the world. Puerto Rico. Egypt. Israel. The Netherlands. All over the United States. Costa Rica. Panama... How, you ask? I found ways to make money on the side. One of those ways was hosting my apartment on AirBnB. If you have an extra room, this is a perfect way to make some extra cash.
Since law school, I have traveled to dozens of countries for pleasure with my family. It's not rocket science. You just need to know how to start some side hustles. Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood. Join now and get a free stock through this link: Join Robinhood and Get a Free Stock!
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