Agribusiness Library LESSON L060091: CALCULATING DEPRECIATION

Objectives 1. Define depreciation, describe why assets are depreciated, and identify examples of depreciable assets. 2. Calculate depreciation using the straight-line method. 3. Calculate depreciation using the sum-the- digits method. 4. Calculate depreciation using the double declining-balance method.

Terms Depreciable assets Depreciation Double declining-balance method Salvage value Straight-line method Sum-the-digits method Useful life

 Depreciation is a term that describes the decline in value of an asset over time.  Depreciation is listed as an expense on an income statement because of the loss of value that occurs each year.  A. Assets are depreciated because, over time and due to use, the total value declines.  Assets are not worth as much as they were when they were originally purchased due to wear and tear and extended use of the items.  Assets are also depreciated for tax deduction purposes because they count as an expense in tax preparation.

 B. Depreciable assets are any assets that have a useful life of more than one year, normally capital assets.  Examples of depreciable assets include machinery, equipment, and breeding livestock.  Items that appreciate in value, such as land, cannot be depreciated.

 Straight-line method is a form of depreciation that considers original cost, salvage value, and life of an item and deducts the same amount of depreciation each year of its useful life.  It is the easiest and most commonly used method of depreciation.  A. Salvage value is the remaining value of an asset at the end of its useful life.

 B. Useful life is the number or years that a depreciable asset is expected to be in use.  The Internal Revenue Service provides a table to use as a guide to determine the useful life of most assets.  C. The straight-line method of depreciation is calculated by taking the original cost of the item minus the salvage value, divided by useful life in years.  The same amount of depreciation is taken each year of the item’s useful life.

 Sum-the-digits method is a form of depreciation that uses the sum of the years of useful life, original cost, and the salvage value of an asset.  The percentage of depreciation declines each year of useful life of the asset.  A. The sum-the-digits method is calculated by taking the total years of useful life of the asset, divided by the sum of the digits of the life, multiplied by the original cost, minus the salvage value.  B. To calculate the sum-the-digits method of depreciation, the following variables are required:  1. Useful life of an item  2. Salvage value  3. Original cost

 Double declining-balance method is an accelerated form of depreciation that takes into account the original cost, salvage value, and useful life of an asset while also considering the fact that an asset will lose most of its value during the first few years of its useful life.  The double declining-balance method of depreciation also converts to the straight line method of depreciation once the straight line value exceeds the amount calculated from the double declining-balance method.

 B. For any given year during the useful life of an asset, the owner should use the straight line method of depreciation if it provides a larger depreciation amount.  A. To calculate the double declining-balance method of depreciation, the following variables are required:  1. Current value of the asset  2. Useful life of the item  C. The algebraic equation is written as: Amount = (Current Value) (2 ÷ Life)

REVIEW What is depreciation, why are assets depreciated, and what are some examples of depreciable assets? How do you calculate depreciation using the straight-line method? How do you calculate depreciation using the sum-the-digits method? How do you calculate depreciation using the double declining-balance method?