How to Find the Depreciation Rate

What is the Depreciation Rate?

The depreciation rate refers to the percentage of the asset’s value that is expensed or written off each year under a chosen method of depreciation. The rate indicates how quickly the asset’s value is reduced over time. Understanding the depreciation rate allows businesses and accountants to predict the financial impact of asset usage, maintenance, and replacement.

The depreciation rate is often used in accounting to calculate depreciation expenses for the company’s income statement, determine the residual value of the asset, and estimate the cost savings from tax deductions associated with the depreciation of assets. The rate can vary significantly depending on the depreciation method chosen, such as straight-line depreciation, declining balance depreciation, or units of production depreciation.

Key Factors That Influence Depreciation Rates

Before diving into how to calculate the depreciation rate, it is essential to understand the factors that influence depreciation:

1. Cost of the Asset: The initial purchase cost of the asset is the starting point for any depreciation calculation. This amount represents the asset’s total value before depreciation.

2. Useful Life: The useful life of an asset is the period during which the asset is expected to be in use, contributing to the business’s operations. This period is often estimated based on the asset's wear and tear, technological obsolescence, or industry standards.

3. Residual Value (Salvage Value): The residual value is the estimated amount that the asset will be worth at the end of its useful life. This value is subtracted from the cost of the asset to determine the amount to be depreciated.

4. Depreciation Method: Different depreciation methods will yield different rates. For example, straight-line depreciation spreads the depreciation evenly over the asset’s life, while accelerated methods like declining balance allocate more depreciation in the early years of the asset’s life.

Learn how to how to find the Depreciation Rate (in percent) with the following formula and example:

Formula:
Rate of Depreciation = Annual depreciation / Total depreciation

Example:
Calculate the rate of depreciation of a car from the following data:
Cost: $45,000
Expected Life: 20 years
Scrap Value: $5,000

Answer:
Total depreciation = 45000 - 5000 = $40,000
Annual depreciation = (45000-5000)/20 = $2,000
Rate of Depreciation = 2000/40000 = 0.05 = 5%