In accounting, Depreciation is an expense recorded to allocate a tangible asset’s cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings.
For example – A company is buying a computer for $1000 and it is expected to be used for 3 years. This three years is known as the life of the asset(Computer). After that time the computer’s estimated worth will be $200.
Here we have three figures:
- Cost: Initial cost of the item ($1000 including delivery, installation etc).
- Salvage:This is the value of the item at the end of the useful life of the item ($200).
- Life: This is the number of periods that the depreciation is applied to (3 years).
Depreciation is calculated in three different ways.
- Straight Line: Simply applies the depreciable cost (Cost – Salvage) evenly among the periods.
- Sum of Year’s Digits: First sums up the periods, literally. For example, here it will be 1 + 2 + 3 = 6. Then creates an accelerated depreciation schedule.
- Double Declining Balance: Creates an accelerated depreciation schedule by doubling the Straight Line depreciation rate but then applies it to the running declining balance of the asset cost, instead of to the fixed depreciable cost.
Calculating Straight Line Depreciation in MS Excel
Creating an Accelerated Depreciation Schedule
Creating an Double Declining Balance Depreciation Schedule in Excel
Calculating a Mid-Year Depreciation Schedule