How to Calculate Depreciation Expense

Definition: Depreciation Expense (or annual depreciation) is the loss in value of a fixed asset in a year. There are several methods of calculating depreciation, including straight line method, declining balance method, sum-of-the-years'-digits method, etc.

Example 1:
An equipment which costs $40,000 is expected to have a useful life of 5 years and a scrap value of $5,000. Calculate the annual depreciation charge using straight line method.

Answer:
Formula: Annual depreciation = (Cost - Scrap value)/Useful life
                                             = (40000-5000)/5 = $7,000

Example 2:
Calculate the annual depreciation of vehicle using declining balance method:
Cost of vehicle = $40,000
Estimated useful life = 4 years
Expected disposal value at the end of useful life = $2,500
Depreciation rate = 50%

Answer:
Depreciation (year 1) = $20,000
Depreciation (year 2) = (40000-20000)x50% = $10,000
Depreciation (year 3) = (40000-30000)x50% = $5,000
Depreciation (year 4) = (40000-35000)x50% = $2,500

Recommended Reading:

Reducing Balance Method of Depreciation

Straight-Line Method of Depreciation

Units of Production Depreciation Method

Definition: Units of Production Depreciation Method (also known as units of output method) calculates depreciation on the basis of expected output produced with the assets.

Formula:
Annual Depreciation = ((Cost of Fixed Asset - Residual value)/Estimated Production)) x Actual Production

Example:
An asset has original cost of $100,000, salvage value $20,000, and is expected to produce 5,000 units. Calculate the depreciation per unit using Units of Production Depreciation Method.

Answer:
Depreciation per unit = ($100,000−20,000) / 5,000 = $16