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# Depreciation

Modified on 2011/06/08 10:46 by swathen Categorized as Uncategorized
Accelerated Method of Depreciation
Double Declining Method Depreciation
Straight Line Depreciation
Amortization
Fixed Assets - NonCurrent Assets
Balance Sheet
Contra Asset Account

Accounting Depreciation

Depreciation, in the field of accounting, is the allocation of the cost of a tangible asset over its useful life. The idea is to match the cost of the asset to the revenues it helps to generate over its useful life.

Depreciation represents the declining value of a physical asset over time, due to usage or obsolescence. It is recorded as an expense on the income statement. It is recorded as a noncash expense, added back to net income, on the cash flow statement. And it is accumulated in a separate contra-asset account on the balance sheet. Depreciation expenses reduce taxable income without reducing cash flows, so companies often want to incur as much depreciation as possible as soon as possible for the benefit of the tax savings. There are several methods of depreciation (see below).

Two related accounting terms are amortization and depletion. Amortization refers to the depreciation of intangible assets, while depletion refers to the declining value or availability of natural resources.

Depreciation Schedule Calculator

To calculate the depreciation schedule for an asset, you need to know the asset’s purchase price, salvage value, and useful life. The salvage value is the amount the asset is worth at the end of its useful life. The depreciable base is the purchase price minus the salvage value. Depreciation continues until the asset value declines to its salvage value.

Depreciable Base = Purchase Price – Salvage Value

Straight-Line Depreciation Expense = Depreciable Base / Useful Life

For example, if an asset was purchased for \$100, its salvage value is \$0, and its useful life is 10 years, then, using the straight-line method of depreciation, the annual depreciation expense for the asset would be \$10. After 10 years the asset will have depreciated to its salvage value, in this example \$0, and depreciation for the asset will no longer occur.

Depreciation Rate

The depreciation rate is the rate at which an asset is depreciated each period. To calculate the depreciation rate, divide the depreciation expense by the depreciable base. To find the depreciation expense using the deprecation rate, multiply the depreciable base by the depreciation rate.

Depreciation Rate = Depreciation Expense / Depreciable Base

Depreciation Expense = Depreciation Rate x Depreciable Base

In the above example, the straight line depreciation rate would be 10% (10% = 10/100).

Depreciation Methods

Modified accelerated cost recovery system (MACRS) method of depreciation is required by the IRS but is not approved by GAAP. Other methods of depreciation, which are approved by GAAP for external reporting purposes, include straight-line method, accelerated method, double-declining balance method, and sum-of-the-years’-digits method.