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# How To Calculate Depreciation

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From company cars to factory equipment, there are numerous assets that depreciate in value over time. Within the United States, accountants are required to calculate and report depreciation on financial statements according to the generally accepted accounting principles (GAAP). Hereâ€™s how to calculate depreciation using several popular methods.

Many assets lose value over time, meaning that their end value will be less than the initial purchase value. In business accounting, depreciation is a method used to report the cost of these capital investments across the years of their use, while acknowledging the loss of book value over time. It reduces the asset value on the business balance sheet.

## What do you need to use a depreciation calculator?

No matter which method you choose to calculate depreciation, youâ€™ll need to have some basic figures close at hand.

• Useful life: This represents the number of years that your business will be realistically using the asset. This will depend on the type of fixed asset. For example, electronic devices will have shorter lifespans than properties, due to constant advances with technology making older devices obsolete.

• Salvage value: This is an estimate of the assetâ€™s value at the end of its useful life. If you plan to use the asset until it no longer holds any resale value, this would be zero.

• Initial cost: This tallies up all the costs associated with the initial asset acquisition, including its purchase cost as well as any sales tax, shipping fees, and training costs.

## Four ways to calculate depreciation

There are four methods to choose from when calculating depreciation. Weâ€™ll start with the most used, the straight-line method.

1. Straight-line method: Subtract the salvage value from the initial cost, and then divide this by the number of years in the useful lifespan. To calculate monthly depreciation, divide this value by 12.

2. Declining balance method: This method recognizes the bulk of an assetâ€™s depreciation in the first years of its use. This leads to a larger gain if the asset is sold. You can calculate it by multiplying the current book value by the chosen depreciation rate.

3. Sum-of-the-years-digits method: This is an accelerated method that adds together the digits of its lifespan in years. Multiple these by its remaining lifespan, and then multiply this figure again by asset cost minus salvage value.

4. Modified accelerated cost recovery system method: Another accelerated method, this option lets you report a larger tax write-off early in the years of the useful life. Useful life depends on the asset class. For example, vehicles and machinery are five years, while furniture is seven years.

Thereâ€™s some variation within the framework of these four calculation techniques. If you have the basic information (salvage value, initial price, and useful life) available, you can plug these figures into an online depreciation calculator for quick results. The straight-line method is the most straightforward as it spreads the cost of depreciation out evenly over time.

## Is accumulated depreciation an asset?

Accumulated depreciation refers to the total, cumulative depreciation of an asset recorded up to a specific point. To record an assetâ€™s book value on the balance sheet, you subtract the accumulated depreciation from its purchase price. However, accumulated depreciation itself is neither an asset nor a liability. You can record it in a contra asset account with a credit balance to reduce the fixed assetâ€™s book value.

Accounting software helps you keep track of asset value, including depreciation. Automating these calculations helps reduce error and ensure youâ€™re recording the accurate reduction in value over time for tax purposes. GoCardless integrates easily with over 300 partners, including top accounting software like Xero to help you streamline your workflow from a central dashboard.Â

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