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Depreciation expresses the loss of value over time of fixed assets of a business. It is a fundamental concept of business accounting. On the books, depreciation is recorded as an expense. Calculating depreciation involves taking into account the number of years that a piece of equipment is expected to be used, for example, for business purposes. Assets may suffer a decline in value due to wear and tear, damage, deterioration or obsolescence, among other factors. This article is about the declining balance and straight-line methods for calculating depreciation.

## Straight line method

Find out how much the asset cost. If you don’t know, the purchasing, accounting, or operations departments should be able to help you.

Find out the estimated useful life of the asset. This is the number of years the asset will be in use. You should be able to get this information from your accounting or operations department.

Calculate the annual depreciation. The straight-line depreciation formula is as follows: cost of the asset divided by the number of years of its useful life. For example, if the cost of your asset is US $ 25,000 and its estimated use is 5 years, your calculation would be US $ 25,000 / 5 = US $ 5,000. The asset is expected to lose $ 5,000 of its value each year. At the end of the 5-year period, its book value will be zero.

## Decreasing balance method

Find out the cost of the asset.

Find out its shelf life. Ask the accounting or operations department for this information.

Find the annual rate of decline in value. The formula for the declining balance method is as follows: 100 percent divided by the number of years of useful life, then multiplied by 2, that is, (100% / x) X 2, where x is the number of years of useful life. Assuming the cost of the asset is $ 25,000 and its useful life is 5 years, calculate the following: (100% / 5) x 2 = 40%.

Apply this rate to the value of the remaining asset each year. For example, if the cost of your asset is $ 25,000, you would multiply $ 25,000 by 40 percent to get $ 10,000. After one year of use, the asset’s value will decrease by $ 10,000 ($ 25,000 – $ 10,000 = $ 15,000). The second year, you would apply the decline rate to $ 15,000, the remaining balance: $ 15,000 x 40% = $ 6,000. Then you would deduct $ 6,000 from the $ 15,000: $ 15,000 – $ 6,000 = $ 9,000. In the third year, calculate the rate of decline by multiplying $ 9,000 by 40%, which equals $ 3,600. Deduct $ 3,600 from the $ 9,000 to arrive at the depreciation amount for that year: $ 9,000 – $ 3,6000 = $ 5.4000. This calculation continues for the duration of the asset’s useful life.