Depreciation Expense is one type of accounting method used to allocate the cost of a tangible asset over its useful life. it is the part of cost of an asset expense for the specific accounting period. Depreciation Expense is maintained on the income statement as a separate line item under operating expense.
Depreciation Expense Calculation Method
Depreciation Expense is calculated based on a number of elements such as the asset's cost, useful life, and salvage value(i,e. the estimated value of assets at the end of their useful life of assets. there are a some number of methods for calculating depreciation such as the straight-line method, the sum of the years method, the declining balance method,, and the written-down value method.
Depreciation Expense Purpose
The purpose for recognizing Depreciation Expense is because of cost of the asset is to be matched with revenue generated from uses of assets during the useful life of assets. revenue generate means to save the tax by increasing the expense. Recognizing a portion of the cost of assets as an expense in each period. depreciation is to be booked under the expense side in the financial statement and the financial statement provides more accurate data about the company for a profitable point of view.
Depreciation Expense Under Income Statement
Generally, follow and accept Accounting policies that are GAAP for the Depreciation Expense to be taken under Income Statement and this is important because it helps to match the values of the cost of fixed assets with the revenue they generate. this improves the assurance of the proper value of assets. Depreciation Expense is reported under 2 financial statements which are the income statement and also the balance sheet.
Depreciation Expense is reported under the Income statement by a separate line item under operating expense. in this method, we do the amount of depreciation reflected in these periods which have been recognized. we do depreciation in the balance sheet on the asset side then we called as accumulated depreciation. accumulated depreciation another name is called as contra assets. which reduces the value of long-term assets. so accumulated depreciation books on the balance sheet under the assets side under long-term assets. long term assets mean fixed assets these asset uses a life period above 1 year and are non-convert to another asset and accumulated depreciation is classified under non-current assets.
Example:
one company purchased machinery cost of $50000. and there is a useful life of 10 years. the company decides to straight-line depreciation method. in this method, depreciation is to be calculated as a fixed for every year till its useful life. the company purchased machinery cost of $50000 and its useful life is 10 years so every year depreciation is $5000. that is $50000/10 years. if the company used the machine for 2 years so accumulates depreciation is $10000 for 2 years.
Depreciation Expense Straight Line Method
Under the Straight Line Method, every year depreciation is fixed that is a systematic and consistent manner. Depreciation Expenses calculated under the straight-line method need some following information.
Cost of Assets:
Cost of Assets means the total cost of assets including installation charges, delivery charges, and other acquiring charges.
Salvage Value:
This is the estimated value that is assets at the end of their useful life.
Useful Life:
This is the useful life of assets which is the estimated value of assets during which the assets will be used in business.
Formula For Straight Line Method Depreciation
Depreciation expense per year = Cost of asset-salvage value / useful life
For example, the company purchases machinery at $10000 with a salvage value of $1000 and the useful life of machinery is 10 years so, depreciation will be $10000-$1000/10 = $900.
Calculate Depreciation Expense Per Mile Under the Units of Activity Method
Depreciation Expense under the activity method of depreciation is calculated based on the actual usage of assets on activity regarding the assets, this method is most useful for assets of depreciation based on how much they are used such as vehicles. detailed requirement for calculating depreciation under the units of activity method is the same as the above 3 points which are the cost of assets, salvage value, and useful life but one extra point that is the Estimated Total Per Miles Hours In this point it is the estimated total usage of assets over its useful life of the assets.
Calculate The Depreciation Expense Per Mile Using the Production Method
Under the units of production method depreciation expense is calculated based on the actual production of the output of the assets during the given period rather than the usage of assets. this method is mostly used when asset uses in production such as consumed machinery and equipment. requirement information for the calculating of depreciation expense under units of production method 3 point is same as above that is the cost of assets, salvage value, and useful life. but one extra point is the Actual Units of Production in this point Asset produces the actual number of units during the period in which the depreciation expense is to be calculated.
Formula & Tips For The Calculating Depreciation Expense Using The Units of Production Method.
Depreciation Expense = Asset Cost - Salvage Value / Estimated Total Units of production * Actual Units of production
For example, a company purchases a machine of $200000 and estimates the total produced of output is of 20 lakh units and a salvage value $40000 in the current period the machine produces 20000 units with using units of production method the depreciation expense would be = $2 lakh- $40 thousand / 20 lakh * 20 thousand units = $1600.
so, the company does maintain a record depreciation expense of $1600 per unit with produce by the machine.
Depreciation Expense on Balance Sheet
Depreciation Expense does not affect directly the balance sheet but it is an indirect effect on the carrying amount on long-term assets.
When the long-term asset is purchased then we do book the balance sheet on the asset side. if one-time depreciation to be charged on long-term assets then asset value will be reduced. depreciation expense is booked under the income statement as by an operating expense. when we will have shown depreciation expense on the income statement then the company's net income has reduced.
How To Calculate Depreciation Expenses Double Declining Balance
Follow the some following steps for the depreciation expense double declining balance
Determine The Asset Cost: Cost Incurred regarding the asset including any cost incurred related to installation, acquisition, and testing.
Determine The Salvage Value: Estimated value of the asset at the end of its useful life.
Determine The Asset Useful Life: Assume to asset's useful life for calculating of depreciation the asset till revenue-generating it is called as useful life.
Determine The Depreciation Rate: The depreciation Rate is calculated based on the useful life of the asset. lets an example of an asset's useful life is 10 years, so 10 years hence the depreciation rate is 10% but in the double declining balance method depreciation rate is twice times of the straight-line method so, the depreciation rate is 20%.
Example of Depreciation Expense Under Double Declining Balance Method
A company purchases a machine of $200000 with a useful life of machinery is 10 years and a salvage value is $20000.
- Cost of machine $200000
- Salvage value of machine $20000
- Useful life of machine 10 years.
- Depreciation Rate 40%(twice times of 20%)
- 1st-year Depreciation Expense($200000*40%)
- 1st-year Book value of Assets($200000-Depreciation Expense)
Is Depreciation Expense is an Asset?
NO, Depreciation Expense is not an Asset but it is an Operating Indirect Expense and shows under the income statement. the asset is a property of the business and shows under the balance sheet. depreciation expense decreases the value of long-term assets over a period of time. the asset is the consumed for the production of goods and services. the asset is a resource when the company is owned or controlled. the asset is the helping of generating revenue and depreciation is helping of reduced profit, operating expenses, and saving taxes and is a key factor for the net profit of the income statement.
Examples of Assets: Machinery, Furniture, Plant, Equipment, Cash, Bank, Goodwill, Account Receivable, Etc.
i like your this article
ReplyDeleteNice
ReplyDelete