Depreciation Expenses Formula

Depreciation Expenses Formula (Table of Contents)

• Formula
• Examples

What is the Depreciation of Expenses?

This article will discuss the Depreciation Expenses Formula along with the Introduction and various Examples of Depreciation Expenses Formula

Depreciation means reduction. This term is mostly used in Accounting and Tax. Depreciation Expense means how a fixed asset’s cost decreases over its useful time period. Each time a company records a depreciation expense to the fixed asset’s cost in financial statements such as Income statements each fiscal year. There are some properties that will increase over time which is called appreciation expenses. The land is the best example of that. For Tangible (touchable) assets such as building, vehicles, mobiles, machines, etc., the cost reduction is noted as Depreciation Expenses. For Intangible expenses such as brands, marketing, logo, intellectual property, it is called as Amortization. For expenses like fuels, oil prices, natural resources, it is called as Depletion. No matter whether you are buying any assets or investing in any. It can be a small business or large business too. It is very important to know the depreciation as it will be very helpful for tax filings and to know the performance of particular stuff. However, the depreciation expense value changes based on the method one company follows. The Depreciation expense is calculated using the following three methods.

1. Straight Line Method.
2. Unit of Production Method.
3. Double-Declining-Balance Method.

#1 – Straight Line Method

Among 3, this is the simplest formula as we need to plug in the values into the formula straight away. This is got by dividing the difference amount of asset’s cost & salvage value by useful life years.

#2 – Unit of Production Method

This method predicts the expense amount based on the output capability, not with a number of years. Each product unit of an assembly line is assigned with the same expense amount here in this method.

Per Unit Depreciation = (Asset’s Cost – Salvage Value)/ Useful life of each unit

#3 – Double-Declining Balance Method

This method counts the expense of the asset value two times of its book value of the asset each year. This is an accelerated depreciation method.

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Book Value = Cost of the Asset – Accumulated Depreciation

Examples of Depreciation Expenses Formula (With Excel Template)

Let’s take an example to understand the calculation of Depreciation Expenses in a better manner.

Depreciation Expenses Formula – Example #1

#1 – Straight Line Method:

Company A purchases machinery for Rs.5000 and the useful life of the machinery are 5 years and the Salvage value of the machinery is Rs.3000. Now Let us apply the values in the below formula.

Solution:

Depreciation Expense is calculated using the formula given below

Depreciation Expense = (Fixed Asset’s Cost – Salvage Value)/ Useful Life Span

• Depreciation Expense = (5000 – 3000) / 5
• Depreciation Expense = 2000 / 5
• Depreciation Expense = Rs. 400
• Depreciation Expense = 4%

#2 -Unit of Production Method.

Company X buys equipment for Rs.7000 and the useful life of the machinery is 5 years and the Salvage value of the machinery is Rs.4000. Totally there are 20 Units of equipment. Now Let us apply the values in the below formula.

Solution:

Per Unit Depreciation is calculated using the formula given below

• Depreciation Expense = ((200000 -100000)/ 25) / 100
• Depreciation Expense = 40

Total Depreciation is calculated using the formula given below

Explanation

Straight line Method:

Here is the step by step approach for calculating Depreciation expense in the first method.

• Step 1: Asset’s Cost: This is the cost of the fixed asset. This includes actual asset’s preparation cost, set up cost, taxes, shipping, etc.
• Step 2: Salvage Value: After useful lives of an asset, how much reduction has happened in a fixed asset is called salvage value or breakup value or scrap value or residual value. That is, a company may decide to sell an asset in a reduced price post useful life of it.
• Step 3: Useful Life Span: The time duration for which the particular asset is considered to be productive. Post that, it is considered no cost-effective or operational.
• Step 4: After having all the values in hand, we can apply the values in the below formula to get the depreciation amount.

Depreciation Expense = (Fixed Asset’s Cost – Salvage Value)/ Useful Life Span

Unit of Production Method:

The variables we use are the same as the Straight line method except for a number of units produced.

• Step 1: The variable’s values are found. In addition to the other variables, the number of units produced is also noted.
• Step 2: Finally, the Depreciation expense is calculated by applying the estimated values in the below formula.

Total Depreciation = Per Unit Depreciation * Total number of Units Produced

Double Declining Balance Method:

• Step 1: We have to find the straight line depreciation method using the first method.
• Step 2: Book value is found by deducting the accumulated depreciation from the cost of the asset. Mathematically, we can apply values in the below equation.

Book value = Cost of the Asset – Accumulated Depreciation

• Step 3: After having all the values in hand, we can apply the values in the below formula to get the depreciation amount.

Total Depreciation Expense = 2 * Straight Line Depreciation Percentage * Book Value 

Relevance and Uses of Depreciation Expenses Formula

Depreciation Expense is very useful in finding the use of asset’s each accounting period to stakeholders. Tax benefits also take place in depreciation. On the income statement, it represents non-cash expense but it reduces net income too. Lower net income results in lower tax liability too. Though the Straight line method is very straight forward and used in many companies, for tax benefits, many companies use the Accelerated Depreciation method too. It gives high depreciation in the early stage hence showing lower tax liabilities at the beginning stages.

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