Depreciation calculations can have uses beyond financial reporting, accounting, and GAAP considerations. You can use depreciation calculations to help find predictive models for future growth. You can also gather relevant analytical data, ready for sharing. Here is a look at some of the more useful depreciation calculating methods.
The Straightforward Straight-Line Depreciation Calculation Method
To find the straight-line depreciation value of an asset, first, figure out the estimated value the asset will have at the end of its useful life. This is the asset’s salvage, scrap, or residual value. Each of these terms means the same thing.
You can often assume a value of $0. However, many business assets can retain some monetary value, even at the end of their useful life.
(Original cost – Salvage value)/Asset useful life
Once you have a salvage value, you can subtract that value from the assets original cost to find the depreciable base value. Take that value and divide it by the asset’s useful life. The resulting figure will give you an annual depreciation expense.
Figuring out the straight-line value doesn’t come with much difficulty. Still, you may want to have a depreciation calculator available for any of these methods.
The Speedier Accelerated Depreciation Calculation Methods Suite
Several types of accelerated deprecation methods exist, which makes it something of an umbrella term. In all cases, you want to use an accelerated depreciation method to realize more significant deductions during the earlier years of an asset’s useful life.
By contrast, straight-line depreciation calculations give an even depreciation spread across the full life to an asset. Accelerated methods front load the depreciation value.
Declining Balance Depreciation Calculation Methods
The declining balance depreciation method works similarly to straight-line at the start. As an accelerated depreciation method, you will move the straight-line’s annual depreciation expense numbers around, so they weigh heaviest in the early years of asset service life. You will still want to balance things, so the last year of service life still equals the estimated salvage value.
- Turn the straight-line value into a percentage of the original cost.
- Multiply the original value by that percentage.
For example, an asset costs $5,000, has a salvage value of $500, and a life expectancy of 5 years. $900 is the annual depreciation expense and 18% of the original value.
With the declining balance method, you can multiply each year’s depreciated value by the depreciation rate. This will give a far more substantial depreciation expense in the first year. In the fifth year, the multiplier becomes zero, and the ending net book value will equal the salvage value.
Double Declining Balance Depreciation Calculation Method
The double declining depreciation method is a more aggressive approach. Do the same math as the declining balance method, but double the depreciation rate. Using the previous example, the depreciation rate now becomes 36%, and the multiplier becomes .36.
The declining balance methods can become complicated, so make use of a depreciation calculator to keep things straight.
The Sum-of-the-Year’ s-Digits Depreciation Calculation Method Offers a Middle Ground
The sum-of-the-year’ s-digits (SYD) depreciation calculation isn’t as aggressive as the accelerated methods. This depreciation method involves creating a depreciation fraction from an asset’s estimated service life. Start by literally adding the sum of the asset’s estimated years. This will give you the denominator of the fraction you will use.
Using the previous example, five years becomes:
The month number becomes the numerator, starting from the highest number. This will give you:
- 5/15 or 1/3
- 3/15 or 1/5
As before, you find the assets depreciable base value, but now you will multiply the first year by the associate fraction, and continue until the fifth year. Your depreciation calculator can help simplify the fraction to decimal conversions.
- $4,500 *0.333 = $1498
- $4,500*0.267 = $1202
- $4,500*0.2 = $900
- $4,500*0.133 = $599
- $4,500*0.067 = $302
As you can see, the depreciation expense for the first year is still highest, but gradually tapers off.
Use the Units of Production Depreciation Method for Production Assets
This depreciation calculation typically only shows up when calculating the production equipment, like factory machinery that produces something tangible.
The calculation deals with how many items an asset can produce before you phase it out.
- Estimate how many units the asset will produce.
- Calculate the depreciable base value.
- Divide the depreciable base value by the estimated production units.
This process will give you a per unit depreciation rate. You can multiply the actual produced units by this rate each year to find the accumulated depreciation of the asset.
Each of these depreciation calculation methods can serve different purposes. In all cases, the calculations can help you gain insights, develop strategies, and make better decisions. The data you collect will help drive growth.
For any of these calculation methods, use a depreciation calculator. These depreciation numbers can undoubtedly help, but you’ll want accurate numbers every time. A depreciation calculator can eliminate human error and ensure the integrity of your data.