How to Calculate Depreciation on Fixed Assets

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Depreciation is the method of calculating the cost of an asset over its lifespan. Calculating the depreciation of a fixed asset is simple once you know the formula.

Depreciation Calculators

Method 1
Method 1 of 3:

Using Straight Line Depreciation

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  1. For example, if you bought factory equipment for $1,000, then that's the amount that you'll use as the purchase price.
  2. [1] The "scrap" or "salvage" value of the item represents how much it will be worth once it's outlived its usefulness. Subtract that number from the purchase price to get the depreciable cost. [2]
    • For example, if you bought the factory equipment mentioned above for $1,000 and determined that it would be worth only $200 at the end of its lifespan, then the depreciable cost is $1,000 - $200 or $800.
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  3. [3] The asset that you purchased has an expected lifespan just like anything else (your personal computer, for example, is something that you probably don't expect to use for more than a few years). You'll need to know how many years you can expect to get any use out of your new asset and then divide the depreciable cost by that number. [4]
    • For example, if the depreciable value of the asset is $800 and you expect it to last 5 years, then the depreciation is $800 / 5 = $160. That's the amount of depreciation for the asset that you'll enter in your accounting books every year.
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Method 2
Method 2 of 3:

Using the Double-Declining Balance Depreciation

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  1. Your fixed asset has a lifespan, after which it will no longer be of use. That number is usually measured in years. In this example, assume that you purchased factory equipment for $1,000, you expect it to last five years, and that it has a salvage value of $200.
  2. [5]
    • Remember, the factory equipment is expected to last five years, so this is how your calculations would look: 100% / 5 years = 20% and 20% x 2 = 40%.
  3. In this example, the asset was purchased for $1,000.
  4. This calculation will give you a different depreciation amount every year. [6]
    • In the first year of use, the depreciation will be $400 ($1,000 x 40%).
    • For the second year, the depreciable cost is now $600 ($1,000 - $400 depreciation from the previous year) and the annual depreciation will be $240 ($600 x 40%).
    • For the third year, the depreciable cost becomes $360 with a depreciation of $144, and so on.
  5. [7]
    • Using this example, in year 4 the depreciable cost is $216. The salvage value is $200.
    • In year 4, calculate depreciation of $16 to reduce the final value to $200.
    • In year 5, there is no need to calculate depreciation.
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Method 3
Method 3 of 3:

Using the Sum of Years Depreciation

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  1. This will be in table format and it's great to use a spreadsheet for this type of calculation. [8]
    • Your table should have 6 columns and one row for each year in the asset's life plus a header row.
  2. Use the following headers: Beginning Book Value, Total Depreciable Cost, Depreciation Rate, Depreciation Expense, Accumulated Depreciation and Ending Book Value.
  3. As an example, assume a purchase price of $1,000 with a lifespan of five years and a salvage value of $200. [9]
  4. Subtract the salvage value, if any, from the original cost and enter this number in all rows under the Total Depreciable Cost column. In this example, the value is $1,000 purchase price minus $200 salvage value equals $800 depreciable cost. [10]
  5. As the method name implies, you'll do this by summing up the years.
    • Sum the numbers of the years in the asset's depreciable life. Using the example of 5 years, that would be 15 (1 + 2 + 3 + 4 + 5 = 15).
    • In the first year, divide the sum by the last number (5 / 15); in the second year the sum is divided by the second-to-last number (4 / 15) and so on down the column to find the percentage of depreciation rate for each year.
  6. You'll use the sum you derived above to reach this value.
    • $800 x (5/15) = $800 x 33.33 percent = $266.67.
  7. That number will give you the Ending Book Value for that year. It will also be the second year's Beginning Book Value. [11]
    • For example: $1,000 - $266.67 = $733.33.
  8. You'll follow the same pattern with the subsequent years, using the beginning book value for each year as the starting point and using the appropriate percentage based on the year (4 / 15 in the second year, 3 /15 in the third year, etc.).
    • In year 2, the depreciation amount is $213.33 ($733.33 x 26.67%); in year 3 it is $160 ($520 x 20%); in year 4 it is $106.67 ($360 x 13.3%) and in year 5 it is $53.33 (253.33 x 6.67%).
  9. All the percentages in the Depreciation Rate column will total 100 percent. The Accumulated Depreciation will equal the purchase price less the salvage value (in this case, $200).
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Expert Q&A

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  • Question
    Do you use the current price or the price you purchased it?
    Marcus Raiyat
    Foreign Exchange Trader
    Marcus Raiyat is a U.K. Foreign Exchange Trader and Instructor and the Founder/CEO of Logikfx. With nearly 10 years of experience, Marcus is well versed in actively trading forex, stocks, and crypto, and specializes in CFD trading, portfolio management, and quantitative analysis. Marcus holds a BS in Mathematics from Aston University. His work at Logikfx led to their nomination as the "Best Forex Education & Training U.K. 2021" by Global Banking and Finance Review.
    Marcus Raiyat
    Foreign Exchange Trader
    Expert Answer
    You have to use the original price you bought it at. Depreciation is how much value is being lost over time, so you can't use the current price as your baseline.
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      Things You'll Need

      • Asset details
      • Company policy on depreciation
      • Calculator

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      References

      1. ↑ http://www.accountingcoach.com/terms/D/depreciable-cost
      2. ↑ https://www.accountingtools.com/articles/2017/5/15/straight-line-depreciation
      3. ↑ https://www.accountingtools.com/articles/2017/5/15/straight-line-depreciation
      4. ↑ Marcus Raiyat. Foreign Exchange Trader. Expert Interview. 8 April 2021.
      5. ↑ https://www.accountingtools.com/articles/2017/5/17/double-declining-balance-depreciation
      6. ↑ https://www.accountingtools.com/articles/2017/5/17/double-declining-balance-depreciation
      7. ↑ https://www.accountingtools.com/articles/2017/5/17/double-declining-balance-depreciation
      8. ↑ https://www.calculatorsoup.com/calculators/financial/depreciation-sum-of-years.php
      9. ↑ https://www.calculatorsoup.com/calculators/financial/depreciation-sum-of-years.php
      1. ↑ https://www.calculatorsoup.com/calculators/financial/depreciation-sum-of-years.php
      2. ↑ https://www.calculatorsoup.com/calculators/financial/depreciation-sum-of-years.php

      About This Article

      Article Summary X

      1. Write down the asset’s purchase price .
      2. Estimate the salvage value , or how much the asset will be worth when it's no longer useful.
      3. Calculate Depreciable Cost: purchase price - salvage value .
      4. Estimate the asset's lifespan , which is how long you think the asset will be useful for.
      5. Find the amount of Depreciation per Year by calculating depreciable cost/asset's lifespan .
      To learn how to calculate the depreciation of a double-declining balance from our Financial Advisor co-author, keep reading below!

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