Depreciation in finance is known as a non-cash expense. That is, there is no real swapping of cash when the transaction is recorded. Instead of that depreciation expense acts as an investment account which helps accountants to put off the value of assets on the balance sheet over time. The most common process for calculation of depreciation expense is the straight-line method. Here in this article you will get to know how to calculate depreciation expense in simple steps.
Steps for calculation
- Find out the original cost of the asset. This cost is that price which you have paid for the asset. Let us assume that you have purchased a tractor trailer for $ 11,000.
- Find out the useful life of the asset. This figure which you will obtain is the number of years for which the asset can provide value. Let us assume that the expected useful life of the tractor trailer is 5 years.
- Find out the salvage value of the asset. This value is the remaining value of the asset. For example, if the tractor trailer stops functioning, that time you would be able to sell it for scrap parts. You should contact a scrap dealer or junk-yard for estimation. Let us assume the scrap yard estimates the tractor trailer value as worth $ 1,000 for parts.
- Find out the depreciation expense. Deduct the salvage value from the original price of the asset and then divide the obtained figure by the useful life.
- The calculation will be:
($ 11,000 – $ 1,000) / 5 = $ 2,000
If you are an entrepreneur then it is very important for you to know how to calculate depreciation expense as many a time the deal or the exchange is not actually done or sometimes it is not recorded in the record book. In that case you need to know how to calculate depreciation expense. I hope this article would have proved useful for you in this context.
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