 ## How to Find Depreciation in Balance Sheet The loss in value of a physical asset over time or use is known as depreciation. As it depreciates, the part of an asset’s value is transferred into an expense account. Depreciation usually aligns with the cost of using an asset with the income it generates.

If you are wondering what a depreciating asset is, all tangible or physical assets that depreciate over time are considered a part of it. When a company purchases an asset, management must decide how to calculate depreciation.

Common Depreciation Factors

Useful life: The number of years for which a company will use a particular asset.

Salvage value: The amount at which the company sells the asset at the end of its useful life.

Depreciation schedule: The schedule lists the amount of depreciation per year based on the abovelisted factors.

Depreciable base: The total cost that can depreciate over the asset’s useful life. The formula to calculate the depreciation base is:

Depreciable Base=Cost of the asset – salvage value

Common Depreciation Methods

Your choice of depreciation method should be based on how you intend to use the asset to generate income. If the asset is used frequently in the first few years, you should pick a depreciation method with higher early-year expenses. The annual depreciation expense is constant if you plan to use an asset at the same rate each year.

The two common depreciation methods are:

• Straight-line (Prime Cost)
• Diminishing Value

Steps to calculate depreciation

Step 1: Determine an asset’s useful life, salvage value, and original cost.

Step 2: Select a depreciation method that aligns best with how you use that asset for business.

Depreciation Method 1: Straight-line method

The straight-line method is the most common type of depreciation that requires the same amount of depreciation expense each year. To find the annual depreciation expense, divide the depreciable base by its useful life value.

Depreciation Method 2: Diminishing value method

The diminishing value method is focused on depreciation expenses in the early years of an asset’s useful life. It is an accelerated method as expenses are more in the early years and less in the later years.

The straight-line depreciation method would show 20% depreciation per year of useful life while the diminishing value would show a 40% depreciation rate per year.

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