Depreciation On Equipment

Publication Date :

23 May, 2020

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Table Of Contents

What is Depreciation On Equipment?

Depreciation On Equipment refers to spreading the equipment cost after deducting salvage value throughout the life span of such equipment, and such reduction is made using such equipment, reducing its resale value.

What is Depreciation On Equipment?

Explanation

Equipment in accounting refers to assets that are used in day-to-day business operations. Every piece of equipment bought is used over certain years, leading to a decrease in its value. Any office Equipment like devices and other tools bought at a cost cannot be sold at the same price as it has been used. Hence every year, the same or different percentage of amount is deducted from the value of an asset. This amount, which is deducted, is called the depreciation of equipment.

How to Depreciate Equipment?

To depreciate the equipment, you must know the following:

Cost Value: Original price or purchase price of the asset.
Salvage Value: Salvage value is the resale value based on the market.
Book Value: Cost value minus resale value is book value.
A Lifetime of Equipment: Prediction of this is basis the market research, or mostly the government provides a list of life span for each vehicle or equipment.
Method of Depreciation: This is generally decided by the management and calculated until the life span of the asset

How to Calculate Depreciation on Equipment?

Depreciation is calculated using four ways which are discussed below:

Straight Line Method
Written down value Method
Units of productions Method
Sum of the year digits Method

#1 - Straight Line Method

In this method, the same amount is deducted as depreciation. The calculation of the depreciation amount happens after deducting the salvage value. The depreciation cost is evenly spread each year until the asset's life.

#2 - Written Down Value Method

This method calculates depreciation on the cost after deducting the depreciation on each year of an asset; such value is known as Book value. This method can also be referred to as the diminishing or reducing balance method.

#3 - Units of Production Method

It is considered the best method as it is depreciated based on the number of units of machinery produced in the year than how many years machinery is used; as the production increases, depreciation will also be more and vice versa.

#4 - Sum of Year Digits Method

This method is based on the sum of an asset's entire life; this results in a higher amount of depreciation in the initial years and lesser in later years. If machinery is used for three years, the SOYD depreciation will be , first-year depreciation will be 3/6,2^nd year will be 2/6, and last year will be 1/6.

Examples of Depreciation on Equipment

The following are examples of depreciation on equipment.

Example #1 - Straight Line Method (SLM)

Let’s consider the cost of equipment is $100,000, and if its life value is three years and if its salvage value is $40,000, the depreciation value will be calculated as below.

Depreciation = $100,000 - $40,000
Book Value = $ 60,000
Value of Depreciation = $60,000/3 = $20,000

Depreciation for each year will be $20,000 in SLM of Depreciation.

Example #2 - Sum of Years Digit Method (SOYD)

Consider the same example in the SOYD method.

Sum of year Digits will be = 3years = 3+2+1 =6
Depreciation for 1^st yr = $60,000*3/6 = $30,000
2^nd year = $60,000- $30,000 = $30,000*2/6 = $10,000
3^rd year = $30,000- $ 10,000 = $ 20,000*1/6 = $3,333

In SOYD of each year, depreciation will differ, and initial depreciation will be more compared to consecutive years.

Conclusion

Depreciation is used mainly for tax purposes and accounting purposes to know the reaDepreciation is used mainly for tax and accounting purposes to know the asset's real value; the method each entity chooses varies as per its needs and purpose. If a company doesn’t depreciate, then financial reports won't reflect the asset's true value.