How do I calculate depreciation? Depreciation is used in accounts to reduce the value of a fixed asset over a period of time. There are several different methods of depreciation that a business can use, once you have chosen your method then you will need to use the same method each time.
What depreciation methods are there?
The most popular methods are:
- Straight line depreciation – An equal figure is posted in each period over the lifetime of the asset. Example: A business buys a new computer for £300, which is going to be depreciated over 3 years. Each year the business will show £100 (£8.33 per month) in the accounts.
- Reducing Balance Depreciation – The depreciation is higher in the early stages of the assets life and then reduces over time. This method is usually used for cars, which depreciate very fast in the early stages of ownership.
How do I Calculate Depreciation – Calculators
We have produced two depreciation calculators, straight line and reducing balance. These calculators are great to see how much your asset will depreciate over time. Use our depreciation calculators.
How long should I depreciate an item for?
This will depend on the type of item. For a car it can be the estimated length of time you expect to own it, computers normally have a life span of 2-3 years, but items like furniture and machinery you may want to spread over a longer period.
If you are unsure, it is worth seeking advice from your accountant, they can normally inform you of the best method and period to use.
How is depreciation shown in the accounts?
Each period value is posted to the depreciation account on the Balance sheet and an expense to the business on the Profit and Loss Account.
Take a look at the depreciation accounting section to find out further information on the different methods and also a free calculator.
What Is Accumulated Depreciation?
Accumulated depreciation is the total of the depreciation over several years and is found on the balance sheet.
Below is an example of accumulated depreciation
A small business purchases a computer for 300.00 and will depreciate it over three years using the straight-line method.
Each year 100.00 will post to the depreciation expense on the profit and loss account and 100 to accumulated depreciation on the balance sheet.
After two years the balance sheet will show 300.00 Asset and 200.00 accumulated depreciation. It will leave a balance of 100.00 on the asset for the third year.
How do I Calculate Depreciation? – Summary
- Choose the best method of depreciation and always use it.
- Decide how many years to depreciate over
- Calculate the depreciation
- Post the figures to the accounts
Further information on how do I calculate depreciation is available on the balance website
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