How to calculate the depreciation of an asset using the
straight line method
||Since the last two weeks
many students have been talking about depreciation calculations
in general and how we can use Microsoft Excel to do the calculations
First of all, what is depreciation?
Depreciation is the decline in value of an asset like a computer,
furniture, car, etc. in a business in a financial period. The decline
or depreciation happens mailnly due to wear and tear. The income tax
department recognizes this expense and allows the business to deduct a
certain amount every financal year in whch the asset is used. The
amount of deduction allowed varies from country to country and is well
defined for most assets. Land is generally not included.
Where in our account books do we make an entry for depreciation? In the
The asset value decreases by the same amount in our asset book entry to
complete the double entry system. We calculate our gross income. To
arrive at our net income we minus the different expenses like salaries,
repairs and maintenance, rent, etc. to arrive at our 'net income before
depreciation and taxes'. Now we minus the depreciation expense to get
our final net income on which we pay our tax.
|Let's take an
example. A small business runs a computer training
center. It needs funiture, computers, etc - assets that it will use
over a period of time, say, 3 to 5 years before it replaces them with
newer products. This also means that the assets are depreciating over
this lifetime. Finally they may sell the stuff and buy new ones. The
money that they receive on selling the depreciated assets is known as salvage
value or scrap value.
To calculate the depreciation now you need the:
The formula for calculating the depreciation using the straight line
- Purchase price
- lifetime of the assets
- Salvage value
annual depreciation expense=(cost of fixed asset - salvage
value)/lifetime of asset
Book value = original cost - accumulated depreciation
Book value at the end of a financial year becomes book value at the
beginning of next year (opening balance). The asset is depreciated when
the book value equals scrap or salvage value.
Let's have a look at the training video
calculate the depreciation of an asset using the straight line method