How to Deduct Depreciation
Depreciation is the way to account for wear and tear on assets over time. It allows accountants to accurately reflect the true value of assets. While there are several different types of depreciation methods used, the straight line method is the most common due to its simplicity. The straight line method requires the accountant to know the original price of the asset, salvage value of the asset, and the useful life of the asset. The calculation provides the accountant with an annual amount to deduct from the value of the asset on an annual basis. The amount is referred to as depreciation expense.
1
Research the useful life of the asset. This is the number of years the asset will provide value. For instance, some cars are said to work for 10 years and so they have a useful life of 10.
2
Determine the original cost of the asset. This is the amount you paid for the asset. A car that has a sticker price of $30,000 but is purchased for $28,000 costs $28,000 for accounting purposes.
3
Determine the salvage value of the car. The salvage value is the value of the car after its useful life. This is also referred to as the scrap value. For instance, you may be able to command as much as $5,000 for the car's parts after it stops running.
4
Calculate the depreciation expense. The depreciation expense is calculated by subtracting the salvage value from the original cost of the asset and dividing by the useful life. The calculation for the car is $30,000 minus $5,000 divided by 10 years or $2,500. This is the amount to be deducted from the value of the car every year over the next 10 years until the value of the car is completely written off.
5
Calculate the value of the asset after the first year. Deduct $2,500 from $30,000 for the new book value of the car. The new book value of the car is $27,500. Deduct another $2,500 in the proceeding year, and so on, until the original cost of the car is completely written off.
