CALCULATE DEPRECIATION OF FIXED ASSETS - STEP 1-4

How to Calculate Depreciation on Fixed Assets - This article is intended to assist entrepreneurs and business inclined people to know the amount of depreciate they have on their their fixed assets in a company. This material was gotten from wikihow.com webpage. Read them carefully.

Four Methods available in this post: Calculate Depreciation on Fixed Assets Step 1-4

Depreciation Calculators
Straight Line Depreciation
Double-Declining Balance Depreciation
Sum of Years Depreciation

There are several methods for calculating the depreciation on fixed assets, depending upon a company's policies and purposes. It has a direct effect on a company's balance sheet and net worth, because the depreciation is accrued in a contra-account to the Fixed Assets account. It is important to know how to calculate deprecation on fixed assets using the most popular methods of straight line, double-declining balance, and sum of years so that a company can make wise, informed fiscal choices.

Method 1 of 3: Straight Line Depreciation

1. Enter the asset's purchase price.
2. Subtract the salvage value, if any, to find the depreciable value.
3.  Divide the depreciable value by the asset's life, or term of years that the asset will be kept and useful.

    The result is the amount of annual depreciation for that asset. It will be accrued each year over the life of the asset.
    Assuming a purchase price of N1,000, a salvage value of N200 and an asset life of 5 years, the annual depreciation under this method would be N160 per year (1000 - 200 = 800; 800 / 5 = 160).

Method 2 of 3: Double-Declining Balance Depreciation

1. Determine the expected life of the asset.

a. The asset life is used to determine the rate at which the depreciation will accrue.
b. Using the same example asset as above, assume a 5-year asset life.

2. Divide 100 percent by the number of years in the asset life and then multiply by 2 to find the depreciation rate.

a. In our example, 100% / 5 = 20 percent; 20 percent x 2 = 40 percent.

3. Determine the asset's purchase price. Consider this the depreciable basis value.

4. Multiply the current depreciable basis by the depreciation rate to find the year's depreciation.

a. In the first year of use, the depreciation will be N400 (N1,000 x 40 percent).
b. For the second year, the depreciable value is now N600 (N1,000 - 400) and the annual depreciation will be N240 (N600 x 40 percent).
c. For the third year, the depreciable basis becomes N360 with a depreciation of N144.

5.  Cease accumulating depreciation in any year in which the depreciable basis will fall below the salvage value.

a. Using this example, in year 4 the depreciable basis is N216. The salvage value is N200.
b. In year 4, calculate depreciation of N18 to reduce the depreciable value to N200.
c. In year 5, there is no need to calculate depreciation.

Method 3 of 3: Sum of Years Depreciation

1. Create your depreciation schedule.

a. Your chart should have 6 columns and one row for each year in the asset's life plus a header row.

2. Label the columns in the header row as follows: Beginning Book Value, Total Depreciable Cost, Depreciation Rate, Depreciation Expense, Accumulated Depreciation and Ending Book Value.

3. Enter the purchase price of the asset in the first row under the Beginning Book Value column.

4. Subtract the salvage value, if any, from the original cost and enter this number in all rows under the Total Depreciable Cost column.

5.  Calculate the depreciation rate.

a. Sum the numbers of the years in the asset's depreciable life. Using our example of 5 years, that would be 15 (1 + 2 + 3 + 4 +5 = 15).
b. In the first year, divide the sum by the last number (5 / 15); in the second year the sum is divided by the second-to-last number (4 / 15) and so forth down the column to find the percentage of depreciation rate for each year.

6.  Find the depreciation expense by multiplying the Total Depreciable Cost in the first year by the depreciation rate.

a. N800 x (5/15) = 800 x 33.33 percent = 266.67.

7. Subtract the first year's deprecation from the Beginning Book Value to determine the Ending Book Value; this is also the second year's Beginning Book Value.

a. N1,000 - 266.67 = 733.33.

 Fill in the rest of the schedule.

8. In year 2, the depreciation amount is N213.33 (N733.33 x 26.67 percent); in year 3 it is N160 (N520 x 20 percent); in year 4 it is N106.67 (N360 x 13.3 percent) and in year 5 it is N53.33 (253.33 x 6.67 percent).

9. Note that all the percentages in the Depreciation Rate column will total 100 percent. The Accumulated Depreciation will equal the purchase price less the salvage value.

Tips

Check with the accounting manager of your company before attempting to calculate depreciation on fixed assets. Most businesses have stringent rules and policies for accounting for depreciation.

Things You'll Need

    Asset details
    Company policy on depreciation
    Calculator

Sources and Citations
http://www.wikihow.com/Calculate-Depreciation-on-Fixed-Assets
http://www.assetaide.com/depreciation/calculation.html
http://www.principlesofaccounting.com/chapter%2010.htm
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