Owning a business requires basic mathematics. Some equations can be simplistic and easy while others are a little trickier to resolve. Every business utilizes assets to function, which means you should have on equation memorized. That one mathematical equation that should be burned in your brain is how to calculate depreciation. Depreciation accounts for the decrease in value of a company’s specific asset over time. This is not only an important and helpful factor in finding the worth of an asset you’ve purchased for your business, but having the correct depreciation is necessary for accounting and tax purposes.
Necessary Information For How To Calculate Depreciation
- Useful life of the asset: Available in tables, based on the type of asset, and you will need an accountant for this
- Minus salvage value: This is the value of the asset at the end of its useful life and is determined by a table
- Divided by the cost of the asset: Include all costs for acquiring the asset i.e. transportation, installation or set-up, and training.
In the end, you will have the resulting value which is called the book value of the asset. The IRS have classifications of assets. They also have calculated useful life on these classes, which you can find in IRS publication 946 or have your CPA find the values to calculate the depreciation. Remember that if an asset is purchased in the middle of the year, then the annual depreciation expense is divided by the months remaining in the year since your purchase date. On top of that, we have an extra nugget of knowledge regarding your asset’s useful life. When it has been fully depreciated, it’s considered to be “off the books”. This doesn’t mean that it’s not useful anymore, it simply means that the company can’t take any further depreciation expense on that asset.
Not all roads lead to the same place, but there are three methodologies that lead to your depreciation solution. These methods on how to calculate depreciation are known as the straight-line depreciation, (double) declining balance, and sum of the years’ digits.
- Straight-line: This method you choose to depreciate your property at an equal amount of each year over its useful lifespan
- Declining Balance: This method is more complicated to calculate, but it recognizes the majority of an asset’s depreciation early in its lifespan.
- Sum of the years’ digits (SYD): This method takes an asset’s expected life and adds together the digits for each year and is an accelerated method to calculate depreciation
Most companies will use a standard depreciation method for all of their company’s assets. Whatever works best for you and your business is great! Some depreciation methods are industry specific, and if you are just starting out research what others in your industry utilize. If you have more questions or need assistance on how to calculate depreciation, Steph’s Books would be more than happy to help. Whatever your business is, we know what depreciation method will work best for you and your needs. Call us today!