How to calculate depreciation?
An asset is not counted as an immediate expense when it is purchased by a business. The cost is accounted for over a number of years by calculating depreciation. Calculating depreciation is important when a company writes off expenses.
The simplest type of depreciation is called straight-line depreciation. This method evenly spreads out the cost of a good over its expected life.
- Example-Mary spends $2,000 on a new computer. She thinks that the computer will last for five years. In five years it will no longer have any value. Every year $400 will be calculated as the expense.
Mary would write down the following information:
Then Mary would keep the following to note depreciation expense for the computer:
Depreciation Cost 400
Accumulated Depreciation 400
The term “accumulated depreciation” is referred to as a contra-asset. These accounts can help offset other ones. Accumulated Depreciation is a tool to offset the computer.
The balance of computer and the amount for Accumulated Depreciation provides the Computer balance which is also called the “book value”. In this example, the computer has a value of $1,600 after the first year ($2,000 purchasing price subtracted by $400 Accumulated Depreciation).
These figures are entered to Accumulated Depreciation. This provides a record of:
- Provides figures on how much the good cost
- Provides a record of the amount of depreciation against the good up to this point in time.
- Example-In the span of five years, Accumulated Depreciation will reach $2,000 which is how much the computer cost in the first place. At the time the asset has no book value, Mary will be able to write off the good:
Accumulated Depreciation 2,000
At that point in time, there is no balance under computer or accumulated depreciation.
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