Depreciation is an accounting method that helps calculate the cost of a physical asset over its lifespan. Physical assets will invariably reach a time where they will no longer be of any use to the organization. The concept of depreciation helps these organizations account for how much of the asset’s value is used up over time. This information is crucial for accounting and tax purposes. Ignoring depreciation can also significantly affect your profit margins.
Below, we’re going to give you a detailed explanation of how our depreciation calculator works. You can use this information to have an idea of how an asset will get accounted for, during its lifespan.
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What Data Do You Need To Calculate Depreciation?
Before you can get to calculating depreciation, you’ll need to collect some data on your assets. Keeping this at the ready will help you streamline the entire process of calculating the depreciation of your various assets.
Aside from knowing your asset and the category it belongs to, it would be best if you had an idea of the asset’s cost. Next, you need to know the asset’s useful life. This information is available in the form of tables online. Before you purchase an asset, it is common practice to have an idea of how much you can sell it for, once it reaches the end of its life. In layman terms, this is known as ‘resale value’. However, in accounting terms, this is known as the ‘salvage value’ for that asset.
Now you are almost ready to start using our depreciation calculator. In the next few sections, we’ll detail the different ways you can calculate depreciation.
Calculating Straight Line Depreciation
The straight-line method is the most basic method to calculate depreciation. As the name suggests, the depreciation value is constant across the lifetime of the asset. In other words, the same depreciation is reported until it reaches the asset’s salvage value.
On the calculator, this is the default option to calculate depreciation. It is accessible on the drop-down list under the “depreciation method”. For this method, you need not worry about the DB factor in the calculator. As we will show you later, this applies to another way of depreciation calculation.
How To Calculate Sum-Of-The-Years’ Digits (SYD) Depreciation?
Accelerated depreciation calculation is the primary use-case for the SYD method. Accelerated depreciation is a way to account for assets that depreciate faster at the beginning of its life than towards the end. Automobiles are an example of an asset that can benefit from accelerated depreciation.
In the SYD method, all digits of the expected life of the asset are first combined. For example, an asset with a 3-year lifespan will have a base sum of 1+2+3 = 6. The depreciation in the first year is about 3/6th of the depreciable base. It becomes 2/6th in 2nd year and only 1/6th in the final year. As you can see, the values keep decreasing towards the end of the asset’s life.
Luckily for you, however, the calculator does all the math behind the scenes. All you need to do is input the values just like you did for the straight-line method. Our calculator does all the heavy-lifting and shows you how your asset depreciates over time.
How To Calculate Declining Balance Depreciation?
Like the SYD method, this method also records larger depreciation at the beginning of the asset’s lifespan than towards the end.
You need not worry about the math behind the whole process (we got that covered). All you need to do is enter the data like you usually would, but this time, also mention a suitable value in the “DB Factor” cell. Once you’re done with that, just hit “Calculate!”
This method proves to be especially advantageous to get tax breaks sooner rather than later. Many companies prefer this, as it helps them recoup investment costs faster.
How To Calculate Declining Balance With Switch To Straight Line Depreciation?
The last method available on the calculator is a hybrid between the straight line and declining balance methods. This amalgamation allows for a more accurate calculation of depreciation values.
As the name suggests, this method uses two ways to calculate the depreciation. Firstly, it uses the declining balance method to account for accelerated depreciation. After a point in the lifespan of the asset, the depreciation value will be higher if calculated via the straight-line method. At this point, the calculator uses the straight-line method and computes depreciation for the rest of the lifespan.
As a user, all you need to do is fill every field with accurate data. The calculator will then compute the depreciation values yearly. This method is also particularly useful to accelerate your tax returns.
As seen above, using a depreciation calculator is easy, effective, and puts you on top of your finances when it comes to tax filing and returns. We hope you find our article informative and useful.