If you own a small business, it is important to learn how to calculate depreciation. It is useful to calculate depreciation to spread the cost of an asset over the period of time that your business will use the asset. When a company buys an asset that will last for longer than one year, the cost of that asset should not be valued as an immediate expense. Rather, the asset's depreciation should be calculated. Depreciation is calculated because if the full cost of the asset were to be counted as an expense for the first year only, then the first year's expenditure would be unfairly burdened against the remaining years the asset is used. There are several methods to calculate depreciation, however, the easiest and most common method of calculating depreciation is using the straight-line method of depreciation.
Before you calculate depreciation, calculate the asset's salvage value. The salvage value is the value of the asset at the end of its useful period. For example, if you have a piece of equipment that you plan to use for its useful life of five years, will you be able to sell the asset at the end of its useful life? Depending on the type of asset it is, you may be able to sell it for a good price, or it may be worthless at the end of its useful life.
Straight Line Depreciation
Straight line depreciation is the easiest way to calculate depreciation. The straight line depreciation method calculates an asset's depreciation by spreading the cost evenly over the life of the fixed asset. To calculate straight line depreciation, you must know the cost of the asset and the expected life of the asset. Next, subtract the salvage value from the cost of the asset. Then, divide this number by the estimated useful life of the asset. For example, a machine for a business is purchased for $6,000. The business expects to use the machine for five years. The business expects to sell the asset at the end of five years for $1,000. Therefore, each year the machine will cost the business $1,000. This is the yearly depreciation value of the asset, and the business will list this value as the expense for the asset. You can also calculate depreciation monthly by dividing the asset by the number of months you estimate it will be in use instead of the number of years.