Depreciation expense is an accounting method used to allocate the cost of a tangible asset over its useful life. Understanding how to calculate depreciation expense is crucial for businesses, as it allows them to accurately track the value of their assets and make informed financial decisions. In this article, we will discuss different methods used for calculating depreciation, and provide step-by-step instructions for each approach.

1. Straight-Line Method:

The straight-line method is the simplest and most commonly used method for calculating depreciation expense.

Step 1: Determine the initial cost of the asset

Step 2: Estimate the useful life of the asset in years

Step 3: Determine the salvage value (the estimated value of the asset at the end of its useful life)

Step 4: Calculate annual depreciation expense using formula:

Annual Depreciation Expense = (Initial Cost – Salvage Value) / Useful Life

2. Double Declining Balance Method:

The double declining balance method is an accelerated depreciation method that takes into account higher expenses in the early years of an asset’s life.

Step 1: Determine the initial cost of the asset

Step 2: Estimate the useful life of the asset in years

Step 3: Calculate and apply double-depreciation rate:

Double-Depreciation Rate = (1 / Useful Life) x 2

Step 4: Calculate annual depreciation expense by multiplying the remaining book value by double-depreciation rate:

Annual Depreciation Expense = Remaining Book Value x Double-Depreciation Rate

3. Units of Production Method:

The units of production method allocates depreciation based on actual usage or production output of an asset.

Step 1: Determine the initial cost of the asset

Step 2: Estimate total units producible during its useful life

Step 3: Determine salvage value

Step 4: Calculate depreciation cost per unit:

Depreciation Cost per Unit = (Initial Cost – Salvage Value) / Total Units

Step 5: Calculate annual depreciation expense by multiplying depreciation cost per unit by units produced in a year

Conclusion:

These are some of the primary methods for calculating depreciation expense. Understanding these techniques can help businesses more accurately track their assets’ value and make better financial decisions. It is essential to choose the method that best suits your business’s individual needs and consult with a financial expert if necessary.