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.
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.
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%.
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.
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.
Your table should have 6 columns and one row for each year in the asset’s life plus a header row.
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.
$800 x (5/15) = $800 x 33. 33 percent = $266. 67.
For example: $1,000 - $266. 67 = $733. 33.
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%).
