Formula and Execution

Original cost

The historical value of the non-current assets is called the original cost.

Residual value

The scrap value of the long term assets is called the residual value.

Life-time

The useful life of the assets is called life-time.

End book value after

The book value of the asset after a specific time is called end book value.

Straight-line Depreciation

Where the depreciation amount is equal each year is called straight-line Depreciation.

Depreciation expense

The annual depreciation amount is called depreciation expense.

End book value

The remaining value of the asset when depreciation expense is deducted from the original cost is called end book value.

Declining balance method of Depreciation

Declining balance method is the type of depreciation method where the depreciation expense is more in the early years and gradually decreases in the later years.

Sume of the years digits depreciation

In this method, the depreciation amount is more in the start years and less in the later years.

Depreciation CalculatorWhy is the depreciation calculator used?How is it helpful?To whom will it help?DepreciationSteps involved in the depreciation calculatorFormulas used in the depreciation calculator FAQSWhich types of assets depreciate?What is the relation between the matching principle and depreciation expense?How to record Depreciation?Is recording depreciation expense good or bad for tax reporting purposes?Which method of Depreciation is best?Is depreciation expense cash or nor cash expense?Are intangible assets depreciate?Why Depreciation is essential?Is Depreciation fixed or variable cost?What is the difference between Depreciation and amortization?How to find depreciation expenses using the straight-line method in Ms. Excel?How to find depreciation expenses using the declining method of Depreciation in Ms. Excel?How to find depreciation expense using sum-of-year’s digits depreciation?

Depreciation Calculator

The companies purchase long term assets for sales generation.  These assets remain with the company for more than one year, giving benefits until it's life is completed. During the use, the long term assets wear and tear and lose efficiency and effectiveness with time. The market value of the asset decreases and becomes obsolete with time. The companies need to find the useful life of the assets and its remaining useful life. That's where the companies require the depreciation calculator. Calculating Depreciation manually is a robust and time-consuming task. “Calculator beast” has developed different tools to make the process easy and straightforward. One such tool is the depreciation calculator

Why is the depreciation calculator used?

Manual calculation of Depreciation poses different problems such as:

  • Manual calculation of Depreciation takes much time, so it's a time-consuming activity.
  • The manual calculation is less reliable as compare to calculation on the calculator.
  • The manual calculation is a slow and tedious task that drains an individual psychologically. 
  • The manual calculation makes the process less effective and efficient.

To eliminate such problems, we use a depreciation calculator.

How is it helpful?

Depreciation calculator is helpful in many ways, such as:

  • The reliability of depreciation calculation increases with the depreciation calculator.
  • It gives quick calculations and saves much of your time.
  • While calculating things on a calculator, it makes the system efficient and effective.
  • The layman can easily calculate Depreciation without any hassle through depreciation calculator.
  • It gives precise value subject to the condition that the values are correctly put in the calculator. 

To whom will it help?

Depreciation calculator is helpful for all those who need to calculate Depreciation such as:

Companies that rely mostly on long-term assets can use a depreciation calculator to find the depreciation expense. And Accumulated Depreciation—and remaining useful life of their non-current assets. 

Students who are doing their assignment on Depreciation can use a depreciation calculator to calculate the depreciation amount.

Academics: Those who are doing research on the Depreciation of long term assets can also use depreciation calculator. 

Depreciation

The decrease in the value of the asset over time is called Depreciation. Depreciation tells us that how much the asset value decreases and how much it remains.  Depreciation is a non-cash expense and, if not taken into account, it will significantly affect the business' profit.

Companies depreciate their assets for two purposes 1) Tax 2) Accounting purpose. Depreciation expense decreases the taxable income; in other words, it increases the business's net income. For accounting purposes, accountants deduct depreciation expenses each year from the original cost of the asset to come up with the net book value of the long term assets.

Types of Depreciation

The following are the types of Depreciation.

  1. Straight Line depreciation: Under the straight-line Depreciation of the asset, the depreciation expense is equal throughout the asset's useful life. The formula for calculating the depreciation expense under a straight line is (Total value of the asset – Residual value / useful-life). 

Where 

  • The total value of the asset – is the historical value of the asset.
  • Residual value - is the value of the asset after its useful life.
  • Useful life- is the estimated life that an asset will benefit the business in revenue generation.
  1. Declining balance method: Under the declining balance method, the asset is depreciated more in the early years and less in the later years. The reason behind the high Depreciation in the first years is that that asset is used more in the early years, so depreciated more. With time the efficiency and effectiveness of the asset decrease, so do its use; that's why it depreciated less in the later years. The formula of declining balance is (Remaining useful life – previous year depreciation amount)* depreciation percentage.
  2. Double declining method: In the double-declining method of Depreciation, the Depreciation is the charge on the double rate to the asset. The useful life of the asset is taken reciprocal. For example, the useful life of the asset is 5. Now according to the double-declining method of the Depreciation, the reciprocal of useful-life is 1/5 or 20%. Now, the double of the 20% is 40%, so the asset is depreciated at a 40% rate.
  3. Some of the year's digits depreciation: In this method of the Depreciation, all the years of the useful life are added, e.g., the useful life is five years, so according to SYD 1+2+3+4+5 = 15. For the first-year Depreciation, we will use 5/15 for the second year of the Depreciation; we will use 4/15.
  4. The unit production method of Depreciation: In the unit production method of Depreciation, the Depreciation is the charge to the asset based on the unit produced by the asset during the year. The formula of unit production method is (Historical cost of the asset – salvage value / estimated united produced during its useful life)*unit produced during the current year.

Steps involved in the depreciation calculator

There are four steps involved in the calculation of the Depreciation. These steps are: 

  1. Original cost: Put the historical price of the long term assets in this portion.
  2. Residual value: Put the scrap value of the non-current assets in this box. 
  3. Life-time: Put the value of the useful life of the assets here. 
  4. End book value after: In this box, place the value of the years you want to find the depreciation expense.   

Putting values in these four steps are necessary; otherwise, depreciation expense and End book value portions will show no results.

Example: Company ABC private limited is operating in the manufacturing industry. The worth of their property, plant, and equipment is €10,000, and their asset's residual value is €500. The useful life of the assets is five years. Find the depreciation expense and end book value after one year using a straight-line method, declining balance method, and sum-of-year's digits method.

Solution: 

                 Original cost = €10,000

                 Residual value = €500 

               Lifetime = 5 years 

             Depreciation expense after one year =? 

             End book value after one year =? 

Put these values in the depreciation calculator, and you get the following values.

Formulas used in the depreciation calculator 

There are three formulas used in the depreciation calculator. These are: 

  1. Straight-line depreciation formula: This formula is used to find the depreciation amount of the long term assets. The formula of straight-line Depreciation is {(Original cost – Residual value)/ Life time}. 
  2. The decline of the balance depreciation formula: This formula is also used to find the Depreciation on the long term assets. The formula of the declining balance is (current book value * depreciation rate). 
  3. Sum-of-years’ digits depreciation formula: This formula is also used to find the depreciation amount of the long term assets. The formula of sum-of-years digits is (Individual year/sum of the years). 

Example: Thomas's public limited has equipment worth €10,000. The asset's useful life is five years, and the asset's scrap value is €1200 after its useful life. Find the depreciation expense and end book value using straight line, declining balance, and sum-of-year's digits depreciation.

Solution: 

                  Cost of the asset = €10,000

                  Useful life = 5 years 

                  Scrap value = €1,200

 

Straight line depreciation = (Cost – Scratch value)/useful life 

                                              = (10,000- 1,200)/5

     Depreciation expense = 1,760

     End Book value at the end of 1st year = cost – depreciation expense 

                                                                        = 10,000 – 1,760

     End Book value at the end of 1st year = 8,240

You can solve this easily and quickly through depreciation calculator as follow

 

 

Now let find the depreciation expense using a declining balance method of Depreciation.

 

Cost of the asset = €10,000

 Useful life = 5 years 

 Scrap value = €1,200

Solution:

To find the rate of depreciation we use the following formula

   Rate of depreciation = (1- (scrap value – Original cost) ^ 1/n}

So 

  Rate of depreciation = {1 – (1,200/10,000) ^1/5} 

  Rate of depreciation = 34.56%

Decline balance depreciation = Cost of the asset * depreciation rate 

                                                                  = 10,000*0.3456

Double decline balance depreciation = 3,456

End book value after 1st year = 10,000-3,456

End book value after 1st year = 6,544

You can solve this quickly through the depreciation calculator as follow.

 Now let find the depreciation expense using sum-of-year’s digits depreciation

Cost of the asset = €10,000

 Useful life = 5 years 

 Residual value = €1,200

Solution: 

                 Depreciation expense = {(Original cost – residual value) * individual year / Sum of the year}

                                                            = {(10,000-1,200)* 5/15)} 

                   Depreciation expense = 2,933 

                    End Book value = (cost of the asset - depreciation expense)

                                                 = 10,000 – 2,933

                     End Book value =7,066

You can easily solve this as follow 

FAQS

Which types of assets depreciate?

Assets are of two types 1) Current assets, 2) Non-current assets. Current assets consume within one year, so they don't need to be depreciated over time. Non-current assets last for more than one year, and they need to be depreciated. The useful life of the Non-current assets is more than one year, and their book value is required to be adjusted for depreciation expense.

What is the relation between the matching principle and depreciation expense?

According to the matching principle, the expense incurred and revenue gain in a particular period must be recorded in the same period. If you record the cost of one period in another period, then you are violating the matching principle. Depreciation expenses incurred in a particular period must be recorded in that specific period. If the depreciation expense or accumulated Depreciation incurred is recorded in different periods, it will violate the matching principle of accounting. 

How to record Depreciation?

Depreciation expense must be adequately recorded for the bookkeeping purpose. If the Depreciation left unrecorded, it makes some accounting heads understated, and some overstated. To keeps, the accounting heads balance depreciation must be recorded. The first step in the depreciation record is to pass the journal entry for Depreciation. Journal entry of Depreciation will affect two accounts 1) Depreciation expense account 2) Accumulated depreciation account. Depreciation expense is debited, and Accumulated Depreciation is credited. Depreciation expense is a profit and loss statement item, so the balance of the depreciation expense is recorded in profit loss statement at the financial year-end. In contrast, accumulated Depreciation is a balance sheet account. The balance of this account is recorded in the balance sheet under the head of the long term assets.

Is recording depreciation expense good or bad for tax reporting purposes?

Companies are liable to pay a specific percentage of tax on their operating profit. Companies use a variety of legally allowed tactics to reduce the tax amount payable on operating profit. One such tactic is the subtraction of depreciation amount from the gross profit, which automatically reduces the tax amount payable by the company. The logic behind this subtraction is that that when depreciation expense is subtracted from the gross profit, it reduces the operating profit and hence less tax. 

Example: Let us consider two scenarios in one depreciation expense is deducted from the gross profit. And in other depreciation expense is not deducted, we will check the effect of the depreciation expense deduction on the after-tax profit. 

The gross profit of the company A is €40,000, and the depreciation expense is €5000. The gross profit of the company B is €40,000, and there is no depreciation expense. The tax rate is 40%. Now let us check the effect of the depreciation expense on the after-tax profit.

S.NO.

Description

Company A 

Company B

1

Gross profit

40,000

40,000

2

Depreciation expense

5000

-

3

Operating profit

35,000

40,000

4

Tax-rate 40%

14,000

16,000

5

After-tax profit

21,000

24,000

In the case of company A, the tax amount is €14,000. In contrast, company B will pay €16,000 tax, €2000 more than company A. This decrease in tax for company A is due to depreciation expense.

Which method of Depreciation is best?

There is no hard and fast rule which determines the best or lousy method of the Depreciation. It depends on the business of the company and the industry in which the company operates. Whichever method of the Depreciation best fit for the company is right for that particular company, not for all. 

Is depreciation expense cash or nor cash expense?

Companies either purchase non-current assets on credit or cash, and these non-current assets are depreciated over time. So, depreciation expenses is a non-cash expense, and the company does not pay extra cash when recording Depreciation.

Are intangible assets depreciate?

Those assets who have no physical existence are called intangible assets. Goodwill, patent rights are intangible assets. Depreciation is the property of tangible assets, so intangible assets do not depreciate rather intangible assets amortized. 

Why Depreciation is essential?

Depreciation is important for two purposes 1) allocate the cost of the assets 2) Tax advantage.

Non-current assets lost their value and efficiency over time. Their useful life decreases with time. The cost of the non-current assets must allocate to them correctly over time. Because the assets do not depreciate at once, or immediately rather, they depreciate slowly and gradually over time. So to allocate the cost of the assets to them over time, recording depreciation of the asset is a must. Depreciation gives the tax advantage by reducing the amount of the operating profit.

Is Depreciation fixed or variable cost?

The cost which varies with sales is called variable cost. The cost which does not change with the sales is called fixed cost. Depreciation expense does not vary with the sales, and it is incurred each year until the asset is depreciated fully. So the Depreciation is a fixed expense and is irrelevant to change in sales or other production activities. 

What is the difference between Depreciation and amortization?

Technically both the concept is used to reduce the value of non-current assets. But they have some fundamental differences between them, which are:

  • Depreciation is charged to those assets which have a physical existence. In contrast, amortization is charged to those assets which have no physical presence.
  • Amortization is charged to intangible assets while Depreciation is charged to tangible assets. 

How to find depreciation expenses using the straight-line method in Ms. Excel?

Ms. Excel has a specific function for finding the value of the straight-line Depreciation. Ms. Excel completes the process in the following steps:

  • Put the original value of the asset in any cell of the Excel.
  • Insert the residual value in the following cell. 
  • Put the value of the useful life in the subsequent cell. 
  • Apply the straight-line depreciation function (SLN), and it gives you the value of the depreciation expense using straight-line Depreciation.

Example: The equipment of the Johnson public limited worth €10,000. The residual value of the material is €1,500. The useful life of the equipment is five years.  Find the depreciation expense using the straight-line method of Depreciation.

Solution: 

                 Cost = €10,000 

                 Residual value = €1,500

                 Useful life = 5 years 

You can solve this in Excel as follow. 

Putting ‘=' sign before an Excel formula is necessary; otherwise, Excel will not accept any command.

How to find depreciation expenses using the declining method of Depreciation in Ms. Excel?

Ms. Excel has a specific function for finding the value of the depreciation expense using the declining balance method of Depreciation. Ms. Excel completes the process in the following steps:

  • Put the original value of the asset in any cell of the Excel.
  • Insert the residual value in the following cell. 
  • Put the value of the useful life in the subsequent cell. 
  • Put the value of the period( i.e., for how many years you want to find the depreciation expense)
  • Apply the declining method function (DB)), and it gives you the value of the depreciation expense using a declining method of Depreciation.

Example: The equipment of the Johnson public limited worth €10,000. The residual value of the material is €1,500. The useful life of the equipment is five years.  Find the depreciation expense using the declining method of the Depreciation. 

Solution: 

                 Cost = €10,000 

                 Residual value = €1,500

                 Useful life = 5 years 

                 Period = 1 years 

You can solve this in Excel as follow.

How to find depreciation expense using sum-of-year’s digits depreciation?

Ms. Excel has a specific function for finding the value of the depreciation expense using sum-of-year's digits depreciation. Ms. Excel completes the process in the following steps:

  • Put the original value of the asset in any cell of the Excel.
  • Insert the residual value in the following cell. 
  • Put the value of the useful life in the subsequent cell. 
  • Put the value of the period( i.e., for how many years you want to find the depreciation expense)
  • Apply the sum-of-year’s digits function (SYD), and it gives you the value of the depreciation expense using sums-of-year's digits depreciation.

Example: The equipment of the Johnson public limited worth €10,000. The residual value of the material is €1,500. The useful life of the equipment is five years.  Find the depreciation expense using sums-of-year’s digits depreciation. 

Solution: 

                 Cost = €10,000 

                 Residual value =€1,500

                 Useful life = 5 years 

                 Period = 1 years 

You can solve this in Excel as follow.