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Depreciation is when the value of an asset decreases over time due to wear and tear from routine use.
Our depreciation calculator helps you determine how much a product will decrease in value over a certain amount of time. It looks at variables such as asset cost, salvage value, time of purchase, and depreciation per year to calculate its total depreciation.
The benefits of using a depreciation calculator include:
- Seeing a visual comparison of depreciation expenses
- Obtaining accurate and reliable figures for financial reporting
- Saving time and effort by using automatic calculations
- Reducing the risk of human error
One depreciation method may be more suitable for you to use based on your product. When calculating depreciation, make sure to review the different depreciation methods:
- Declining balance depreciation
- Double declining balance depreciation
- Straight line depreciation
- Annual depreciation
- Units of production depreciation
Declining Balance Depreciation
Declining balance depreciation is the process of recording large, accelerated depreciation expenses during the early years of an asset’s life. This type of depreciation often applies to high-value items such as vehicles, computers, and cell phones.
The value of these products is linked to age and the risk of becoming obsolete over time. Declining balance depreciation can be calculated using the following formula:
Declining balance depreciation = current book value × depreciation rate
Current book value is defined as an asset’s net value at the start of an accounting period. The rate of depreciation is a percentage that describes how much an asset’s value declines in a single year.
Double Declining Balance Method
This method is used to evaluate an asset’s total value immediately after purchase. It’s another form of accelerated depreciation that doubles the normal approach.
The double declining balance method calculates the depreciation of fixed assets more heavily during the early years of ownership. Businesses will typically use this method to defer income taxes in the coming years.
Straight Line Depreciation
Straight line depreciation is the opposite of declining balance depreciation. It’s used to calculate depreciation where the value of a product decreases steadily over time. It divides an asset’s value by the length of its useful life.
Machinery, office furniture, and certain buildings are best suited for straight line depreciation.
Annual Depreciation
Yearly depreciation is the gradual decrease in the value of an item from aging, wear and tear, and obsolescence. It’s a representation of how much of an asset’s value has been used up for the year. Since depreciation is to be expected with most products, it isn’t considered to be a liability.
Units of Production Depreciation
Instead of linking depreciation to time, the units of production depreciation method assigns a fixed amount of depreciation to each item produced by a piece of equipment. For example, if a machine can only produce 10,000 items before it needs to be replaced, then 1,000 items would make up 10% of the equipment’s functional life.
Depreciation FAQs
How does depreciation work?
While depreciation is a process that reduces an item’s value, it’s not done all in one year. Instead, it’s completed over a number of years based on the asset’s lifespan.
When assets depreciate, it helps you plan out how much money you can write off each year. It also gives you more control over the health of your business finances.
The IRS provides a detailed overview of the types of assets that can be depreciated. In general, the item needs to meet these requirements:
- You can evaluate its usefulness.
- The item is expected to last longer than one year.
- You can evaluate its usefulness.
- You either use it in your business or while generating an income.
How to calculate straight line depreciation
You can calculate straight line depreciation using the following formula:
Depreciation per year = (asset cost – salvage value) / useful life
For example, imagine that an office buys new desk chairs for $5,000. The salvage value is $250, and they have a useful life of seven years. Using the formula, this is the result:
($5,000 – $250) / 7 = $678.57
You can deduct $678.57 each year for the duration of each chair’s useful life.
What is recoverable depreciation?
Since depreciation is the value an item can lose over time, recoverable depreciation is the amount you can claim back if something were to happen during its lifespan. For instance, you can file an insurance claim for damage or theft.
This is most commonly used for physical property and determining an item’s worth under an insurance policy.
What is accumulated depreciation?
When you first purchase an asset, there’s an assigned estimated value for the duration of its life. Accumulated depreciation is the total depreciation to date.
This is useful if you need to calculate depreciation from multiple years instead of just one. Business owners may find themselves using this method for these types of items:
- Furniture
- Office equipment
- Machinery
- Buildings
- Computers
- Vehicles
How to calculate accumulated depreciation
This is the formula to calculate accumulated depreciation:
Accumulated depreciation = ((cost of the asset – salvage value) / useful life)) × number of years
For instance, pretend that your company purchased a piece of machinery for $10,000. The estimated life of the machinery is 10 years, and the salvage value is $2,000. Here’s how you would calculate accumulated depreciation halfway through the machine’s useful life:
(($10,000 – $2,000) / 10)) × 5 = $4,000
The accumulated depreciation value over the span of five years is $4,000.
What is bonus depreciation?
Bonus depreciation is a tax incentive where businesses can deduct a large amount of the purchase price on eligible assets immediately after purchase. This method is used in place of evenly writing off depreciation during the duration of its useful life.
What is MACRS depreciation?
Modified accelerated cost recovery system (MACRS) calculates a business’s tax deductions based on the depreciation of eligible assets. It can also assist in establishing larger deductions during the earlier years of an asset’s lifespan.
This contrasts with straight line depreciation because the straight line method uses the same tax deduction each year until the end of the asset’s life. Choosing between the two methods will depend on the type of asset.
What is depreciation expense?
Depreciation expense can be found on an income statement as an expense to represent how much of an asset’s value was used for that specific year. It may not be considered an asset or liability in this instance.
What is depreciation recapture?
Depreciation recapture is a tax provision that requires business owners to increase their gain on a profitable sale of assets. This is specifically an increase on previously reported tax deductions of depreciation in order to help offset taxable income.
Here’s how to calculate depreciation recapture:
Depreciation recapture = sale price of asset – adjusted cost basis
For instance, with a sale price of $5,000 and an adjusted cost basis of $2,000, you would have a taxable gain of $3,000. Depreciation recapture is commonly seen during the resale of property.
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