How To Calculate Depreciation
Depreciation expense allows companies to recover the value of their income-producing property or assets that typically expires through use and over time. Depreciation is calculated for general tax and ledger purposes using one or several methods, but the most common and easiest depreciation method to learn is the straight-line method.
1. Determine the total cost of the asset, including the sales tax, installation costs, invoice and other expenses that you might have incurred to prepare, transport or purchase the asset for your operations. For example, if a printing company has purchased a printing press that costs $16,000 and the sales tax is $1,200 with $1,800 in freight costs and $1,000 in installation fees, that company will computer a total asset cost of $20,000.
2. Determine the salvage value of the asset. In layman’s terms, the salvage value is the residual value that the item is estimated to have before it is disposed of, traded or sold. For the purpose of this example, you can assume that the printing press may be worth $5,000 after it is no longer in use.
3. Subtract your salvage value that you calculated in Step 2 from the total cost that you figured in Step 1. The depreciable cost of the printing press is $15,000, or $20,000 minus $5,000.
4. Determine the useful life of the asset. This is the estimated number of years that you feel the item or asset will be used in your company. You can assume a useful life of five years for the state-of-the-art, modern printing press.
5. Calculate depreciation by dividing the depreciable base from Step 3 by the useful life of the asset from Step 4. In this example, the annual depreciation of the printing press and the amount that you will add to your ledger will total $1,500.
Keep in mind that if you purchase an asset on or before the 15th of any given month, you are considered to have ownership of that item for the entire month. If you are still unsure about calculating the depreciation of an asset, the best thing you can do is to practice with examples either in a library or online to improve your calculations and skills. In addition, it is important to be careful when you are calculating depreciation as any one small mistake could set you back for hours as you work to determine why your books are not balancing at the end.