What is Depreciation?

When a company buys a long-term asset (like a vehicle, machine, or computer), it can't write off the entire cost as an expense in one year. Instead, it "depreciates" the asset, expensing a portion of its cost each year for its "useful life." This matches the cost of the asset to the revenue it helps generate. Key Terms: * Initial Cost: The original purchase price of the asset. * Salvage Value: The estimated residual value of an asset at the end of its useful life. * Useful Life: The estimated number of years the asset is expected to be productive. * Book Value: The asset's initial cost minus its accumulated depreciation.

Common Depreciation Methods

This calculator allows you to use two of the most common methods: 1. Straight-Line Method: This is the simplest and most common method. It evenly spreads the depreciation expense across the asset's useful life. `Annual Depreciation = (Asset Cost - Salvage Value) / Useful Life` 2. Declining Balance Method: This is an accelerated method that records larger depreciation expenses in the earlier years of an asset's life and smaller expenses in later years. The most common form is the Double Declining Balance method, which doubles the straight-line depreciation rate. `Annual Depreciation = (Beginning Book Value * (2 / Useful Life))` Note: The asset is not depreciated below its salvage value.

Why is Depreciation Important?

* Tax Purposes: Depreciation is a non-cash expense that reduces a company's taxable income, thereby lowering its tax bill. * Financial Reporting: It provides a more accurate picture of a company's profitability and asset values on the balance sheet. * Asset Management: It helps companies understand the true cost of their assets over time and plan for future replacements.

Compound Interest Calculator

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Asset Details

Initial Asset Cost

Salvage Value

Useful Life (Years)

years

Depreciation Method

Annual Depreciation

$9,000.00

(First Year)

Year	Beginning Book Value	Depreciation Expense	Ending Book Value
1	$50,000.00	$9,000.00	$41,000.00
2	$41,000.00	$9,000.00	$32,000.00
3	$32,000.00	$9,000.00	$23,000.00
4	$23,000.00	$9,000.00	$14,000.00
5	$14,000.00	$9,000.00	$5,000.00

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