Depreciation
Depreciation is the reduction in value of an asset over time due to wear and tear or obsolescence.
Businesses use depreciation to allocate the cost of fixed assets like machinery, vehicles, and
buildings.
Types of Depreciation
1. Straight-Line Depreciation
o Formula:
Annual Depreciation=Cost of Asset−Salvage ValueUseful Life (Years)\text{Annu
al Depreciation} = \frac{\text{Cost of Asset} - \text{Salvage
Value}}{\text{Useful Life
(Years)}}Annual Depreciation=Useful Life (Years)Cost of Asset−Salvage Value
o Example: A machine costs $10,000, has a salvage value of $2,000, and a useful
life of 5 years. Depreciation=10,000−2,0005=1,600 per year\text{Depreciation} =
\frac{10,000 - 2,000}{5} = 1,600 \text{ per year}Depreciation=510,000−2,000
=1,600 per year
2. Declining Balance Method
o Formula: Depreciation=Book Value×Depreciation Rate\text{Depreciation} =
\text{Book Value} \times \text{Depreciation
Rate}Depreciation=Book Value×Depreciation Rate
o Example: A vehicle costs $15,000 with a depreciation rate of 20% per year.
15,000×0.20=3,000 depreciation for the first year15,000 \times 0.20 = 3,000
\text{ depreciation for the first
year}15,000×0.20=3,000 depreciation for the first year