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How to Calculate Depreciation: Straight Line and Diminishing Value Examples

 How to Calculate Depreciation: Straight Line and Diminishing Value Examples

Depreciation explained

What is depreciation? How to calculate depreciation? Depreciation, amortization, and CapEx tutorial. 

Overview of depreciation accounting (concept and application), and related topics such as accumulated depreciation, book value, residual value, historical cost, fixed assets, amortization, useful life, capital expenditures (CapEx), and capitalization. Intended for students and business people at both entry and advanced levels.

How does that work?

Let's assume you want to buy a truck for your company. You spend $100,000 to buy it.

We usually call that an investment in fixed assets. You could also call it capital expenditures, CapEx in short.

What happens on your balance sheet (the overview of what you own and what you owe) is that cash goes down by $100,000, and your fixed assets (or "plant and equipment") go up by $100,000.

It would be incorrect to book the full $100,000 straight away as a cost for the current year in your income statement because you are going to use the truck for multiple years.

Calculating Depreciation

Depreciation is the method by which the cost of a fall in the value of fixed assets is recognized in the financial accounts of a business. This short revision video explains the two main methods of calculating depreciation.

now depreciation is an accounting term and it's a cost in the accounts of a business but the cost itself represents just the estimate of the falling value of fixed assets over time so depreciation doesn't actually involve a cash flow but it's actually an estimate of the falling value

Briefly introduce the two main methods by which it is calculated by the accountants.

  • The straight-line method is actually pretty common pretty popular very easy to calculate.
  • The other one is called the reducing balance method.

How to Calculate Depreciation

Depreciation is an accounting term that refers to allocating the cost of a tangible asset over its useful life. Done for both accounting and tax purposes, several methods of depreciation exist.

 A common and simple method of depreciating an asset is the straight-line depreciation method. In this video, we'll walk through how to calculate depreciation using the straight-line method.

I'm going to show you how to calculate depreciation utilizing the straight-line method there are several different alternatives for how to calculate depreciation the straight-line method is by far the most simplistic and easiest to do but it's also fairly common although you do see companies utilize different methods on different levels.

so the reason that we calculate depreciation first obviously is because of accounting, we know that we can't necessarily claim the value of an asset as the same over a period of time.

so for For example if we purchase something like a company vehicle and say we purchase it for $20,000 right off the lot, we know that over time that vehicle will not be worth the same that it was when we purchased it not only is it going to accrue mileage but there's going to be additional wear and tear that is going to make it worthless and so for assets, we depreciate those because we know that they lose value over time same thing with equipment like laptops and different things they begin to deteriorate over time.

so we can't claim the value of those as assets on our balance sheets so how do we go ahead and do this there's a basic equation for how to calculate depreciation utilizing.

What is the Reducing Balance Method of Depreciation?

The reducing balance method of depreciation is not the most common or easiest method used to depreciate assets over their lifespan. However, it is more accurate for working out depreciation of assets that lose a lot of value in their first few years of acquisition. Learn More

The reducing balance method of depreciation is not the most common or easiest method used to depreciate assets over their lifespan. However, it is more accurate for working out depreciation of assets that lose a lot of value in their first few years of acquisition.

Today’s video is looking at what is the reducing balance method of depreciation. The reducing balance method is one of the main methods to calculate the depreciation of an asset.

If you do not know what depreciation is. It is the reduction of value to an asset. The reducing balance method of depreciation is a technique used when an asset's worth will decrease in value by different amounts each year.

In order to find out how much the asset is going to be depreciated by each year, the following factors will need to be identified...

Factors needed to workout Depreciation:

  • The cost.
  • the residual value. 
  • the useful life.
  • The Netbook value.

STRAIGHT LINE Method of Depreciation in 3 Steps!

you'll learn how to use the Straight Line Depreciation Method in Accounting. This is the simplest way to depreciate Tangible Fixed Assets. Other depreciation methods include...

  • Straight Line Depreciation Method.   
  • Double-Declining Balance Method.   
  • Some of the Year's Digits Method.     
  • Units of Production Method.              

You'll find out what depreciation means and how it applies to Non-Current Assets on a farm. Then we'll cover a full worked example where you'll learn how to apply the Straight Line Method in three simple steps. This episode of Accounting Stuff is part of a mini-series on Depreciation in Accounting.

so let's jump right in Depreciation is the process of reducing the book value of a tangible fixed asset due to use wear and tear the passing of time or obsolescence Straight-line depreciation is a fixed cost depreciation method where the expense is spread out evenly over an asset’s useful life.

Depreciation Methods: Straight Line, Double Declining & Units of Production

There are several types of depreciation expenses and different formulas for determining the book value of an asset. The most common depreciation methods include:

4 Steps to Calculate Depreciation using the Straight Line Method

Calculate depreciation using the straight-line method using 4 steps.  

Illustrates straight-line depreciation when the asset is placed in service on the first day of the company's fiscal year.

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Depreciation explained
What is depreciation? How to calculate depreciation? Depreciation, amortization, and CapEx tutorial.
Overview of depreciation accounting (concept and application), and related topics such as accumulated depreciation, book value, residual value, historical cost, fixed assets, amortization, useful life, capital expenditures (CapEx), and capitalization. Intended for students and business people at both entry and advanced levels. Learn more.

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