### 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

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