Depreciation is considered a non-cash expense by financial analysts. This is because it does not result in a real cash outlay. You can think of depreciation as the brown on an apple. When you bite into an apple, the part you bite into will turn brown after a while. The brown was not created until after you bit into the apple.
- Depreciation is considered a non-cash expense by financial analysts.
- You can think of depreciation as the brown on an apple.
Accountants found it useful to track the value of this "browning" effect with a convention called depreciation, which allows book-keepers to better match expenses with revenues. Accounting for the usage and depreciation of furniture means knowing two things: the original cost of the furniture and the useful life of the furniture.
Review the calculation for deprecation. The calculation is Cost of the Asset /Useful Life. This is the most common depreciation methodology used for its simplicity. It is referred to as the straight line depreciation method.
Determine the cost of the asset. This is the cost of the furniture. You can verify this with a sales receipt. For example, buying office furniture for £19,500.
- Review the calculation for deprecation.
- Determine the cost of the asset.
Determine the useful life of the furniture. Make your own estimate based on passed performance or ask the sales associate for an estimate. This is also largely dependent on the quality of the furniture. Let's say the furniture has a useful life of 8 years.
- Determine the useful life of the furniture.
- Let's say the furniture has a useful life of 8 years.
Calculate annual depreciation expense. Divide the cost of the furniture (£19,500) by the useful life (8). The calculation is $30,000 / 8 or £2,437. This is the amount you need to write off every year in order to fully depreciate your furniture over the next 8 years.