What is Depreciation?
Depreciation is defined as the value loss to an asset over time. It measures the decreasing value of a business asset, and this can be applied to equipment, tools, furniture, computers, and other assets that are used to conduct business. The depreciation expense of an asset is frequently stretched out over accounting periods.
Calculating Depreciation Expense:
There are many methods to calculate depreciation expense.
Let’s see those methods.
Straight-line Depreciation method:
The straight-line depreciation method applies a flat depreciation expense for the assets. Before calculating the depreciation expense, you need the below terms:
- The cost of the Asset: It includes all the expenses which are associated with transportation and training expenses.
- Salvage Value / Scrap Value: It measures the asset value at the end of its useful life.
- The useful life of the Asset: It depends on the asset. If you don’t know your asset’s life, you have to consult with a tax advisor.
Depreciation Expense = (Cost of Asset - Salvage Value) / Useful life of Asset
Accumulated Depreciation method:
This method tracks the total depreciation cost on your balance sheet. It also increases the overtime as there is a depreciation expense. The accumulated depreciation can be written off only when the asset is finally scrapped.
The straight-line method is more often used for calculating depreciation expense. Apart from the above two methods, there are numerous methods for calculating depreciation expense.
This method increases the asset’s depreciation expense in the initial years of service. It is also known as the declining method, which is used to minimize the exposure of the tax.
Sum of the Years digits:
In earlier stages of the asset’s life, this method works more productively. It used to accelerate the depreciation expense on a waning schedule. Suppose, if the asset’s life is ten years, then this method adds all the digits (4+3+2+1) to get 10 years. For the first year, the depreciation is 4/10 or 40%, for the second year it is 30%, for the third year it is 20% & for the final year it is 10%.
Unit of Production:
Among the manufacturers, the “Unit of Production” is the most popular method. It is used to assign the equal expense rate for each unit and involves subtracting the salvage value from the original cost. It will be divided by the expected asset units.
It’s a tough decision in choosing the best depreciation method. Depending on your financial stability and type of your business, you can select the depreciation method. Also, it’s beneficial for those who are planning to write the CPA exam. Questions? Leave a comment.
Simandhar is the official partner of Becker and AICPA - Largest Training provider for US CPA, US CMA , IFRS and EA courses in India with offices in Bangalore, Hyderabad, Delhi, Ahmedabad, Gurgaon, Kerala, Cochin (Kochi), Trivandrum, Kottayam, Kozhikode, Malappuram, Chennai, and Mumbai.
Learn how to use CPA, from First basics to advanced techniques, with online video tutorials taught by industry Experts. Simandhar Education is best leading CPA Exam in India. Contact [email protected] 919390785925.
Hurry up !!
CPA exam now in India and Simandhar Education will help you to achieve it.
Anji Velagana is the Content Strategist at Simandhar Education and has 2 years of experience in content writing and blogging. He loves pursuing excellence through writing and has a passion for technology & educational content. Contact him on LinkedIn.