Depreciation is a key concept in business accounting. Nearly every business acquires fixed assets, such as office or manufacturing equipment. These assets are expected to decline in value over time as a result of such factors as deterioration and obsolescence. Calculating depreciation is a way of quantifying the rate of decline in value. Depreciation is often calculated on an annual basis. But figuring monthly depreciation can be helpful for accounting purposes as well. Here, we will address only the straight-line and declining-balance methods of calculating depreciation.
Find out how much the asset cost.
Find out the expected useful life of the asset. The operations manager or accounting department should have this information.
Calculate the annual depreciation for the asset. If the asset has a value of £24,000 and the useful life is expected to be four years, the calculation would be as follows: £24,000 / 4 = £6,000. The asset is expected to lose £6,000 in value each year for four years.
Calculate the monthly depreciation for the asset. Simply divide the annual depreciation rate by 12. Example: £6,000 / 12 = £500. The asset is expected to decline in value by £500 each month.
Find out what the asset cost to buy.
Find out the asset's useful life. The operations manager or accounting department will be able to tell you.
Calculate the annual depreciation rate. Assuming again that the asset cost £24,000 and has a useful life of four years, the annual rate of decline in value is figured as follows: 100% / 4 X 2 = 50%.
Divide the rate by 12. The monthly depreciation rate would be 50/12 = 4.166%.
Apply this rate to the remaining value each month. Example: 4.166% X £24,000 = £999.84. After one month in use, the book value of the asset will have declined by £999.84: £24,000 - £999.84 = £23,000.16. For the second month, 4.166% X £23,000.16 = £958.19. The book value of the asset after two months will be £23,000.16 - £958.19 = £22,041.97. Continue the calculation for whatever period of months is necessary.
Depreciation calculations must be performed in accordance with existing tax law. Be sure you and your accountant are up to date on any code revisions.
Tips and warnings
- Depreciation calculations must be performed in accordance with existing tax law. Be sure you and your accountant are up to date on any code revisions.