In order to have more accurate business records, companies depreciate the cost of equipment used over the lifespan of those items. For example, if a company purchases a fleet of vehicles for £65,000 but will use those cars over the next 10 years, depreciation allows the costs of those vehicles to be spread over those 10 years rather than have a £65,000 expense in the first year and no expenses for the next nine years. In order to calculate the depreciation rate, you need to know how much the item costs, what the salvage value will be and how long you expect the item to last.
- Skill level:
- Moderately Easy
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Check your financial records to determine the value of the item that you are depreciating.
Subtract the salvage value of the item you are depreciating from the cost of the item. The salvage value is how much the item will be worth when you are finished with it. For example, if you are depreciating a computer system that you expect to last three years, the salvage value would be how much you expect the system to be worth, if anything, at the end of your use. For example, if you paid £7,800 for the system and you expect it to be worth about £1,950 when you get rid of it, you would subtract £1,950 from £7,800 to get £5,850.
Divide the loss in value by the number of years you expect the item to last to calculate the depreciation rate. In this example, you would divide £5,850 by 3 to find that the depreciation rate would be £1,950 per year.
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