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Depreciation is an accounting principle defined as the reduction of recorded cost of any tangible or fixed asset over a period in a systematic manner until the value of the asset decreases to zero or becomes negligible. A tangible asset can be anything that a business might utilize for their daily operations. Some of the common tangible or fixed assets include land, buildings, furniture, office equipment, machinery, etc. There are three methods of calculating depreciation over a period that all public accounting firms in Edmonton use - straight-line method, unit of production method and double-declining balance method. In this article, we will put light on the first method.
Straight-line depreciation, also known as the fixed or equal-installment depreciation, is the simplest and thus, the most common method used to calculate depreciation. Organizations estimate the residual or salvage value of the asset at the end of the period during which it will be used. The organizations then charge the same amount to depreciate each year over that period, until the value shown for the asset has reduced from the original purchase cost to the salvage value. As mentioned in the definition of depreciation, this residual or salvage value can be zero or negligible. Since depreciation value charged in the balance sheet each year is the same, the amount of the asset declines in a straight line in the sheet.
How to Calculate Straight Line Depreciation
The process that most public accounting firms in Edmonton follow to calculate the straight-line depreciation includes five steps. They are:
You buy a machine worth $50,000 which can be used for five years. At the end of the five years, the machine can be sold for $5,000. The annual depreciation can be calculated using the following formulae:
Depreciation Rate = (1/the useful life in years)*100 = ⅕*100 = 20%
Annual depreciation = (depreciation rate * difference of machine’s cost and salvage cost) = 20% * ($50,000 – $5,000) = $9,000
At the end of five years, the carrying value would be $9,000 on the balance sheet, the depreciation expense would be completed under the straight-line depreciation method.
This method is straightforward, easy to understand and simple to use. Straight-line depreciation is suitable for assets that operate uniformly and consistently over their useful years. Calculate the depreciation value of your business assets with the help of public accounting firms in Edmonton to make sure there aren’t any errors.