For how to calculate depreciation costs, there are several things you need to pay attention to.
First, what you need to do is subtract the asset’s salvage value from its cost to determine the depreciable amount.
Second, divide this amount by the number of years in the asset’s useful life. Divide by 12 to find the monthly depreciation.
Depreciation or depreciation is one of the most important procedures to be carried out to calculate or measure the value of an asset over a period of use.
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The value of business assets over their useful life is known as depreciation. Here is the information you need to calculate depreciation!
What is Meant by Depreciation Cost?
Depreciation is the cost of depreciating an asset at a certain point during its use.
The value of the assets recorded in the balance sheet is the difference between the purchase price and the accumulated depreciation.
Depreciation charges apply to capitalized assets. Which means that the asset is an asset that provides value for more than one year.
Under accounting principles, costs and sales are matched to the period in which the transactions occur.
Therefore, this depreciation can be a solution to the problem of matching capitalized assets.
Depreciation expense is part of the cost of the asset in the year of purchase and over the remaining useful life of the asset.
Meanwhile, accumulated depreciation is the total amount of assets that have been depreciated over the life of the asset.
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Method of Calculating Depreciation Cost
Before entering into a discussion on how to calculate depreciation costs, you should first understand the three calculation methods.
Depreciation can be calculated on a monthly basis using the following method:
1. Straight Line Method (Straight Line)
The first way to calculate depreciation costs per month is to use the straight line method. This method is the method most often used in accounting.
To carry out this method, depreciate your property by the same amount for each year over its useful life.
In this method, there are two formulas that you can use, namely calculations using residual values and without residuals.
The calculation formula in accounting software using residual value is as follows:
Depreciation = (Payment Price − Residual Value) ÷ Use Life
For example, company A bought several computers in January 2000 with a total price of Rp. 100,000,000.
The computer is estimated to have a useful life of 4 years with a residual value of Rp. 4,000,000.
Thus, the amount of depreciation per year is
Depreciation = (IDR 100,000,000 − IDR 4,000,000) ÷ 4 years
= IDR. 96,000,000 ÷ 4 years
= Rp. 24,000,000
While the calculation formula using the residual value is as follows:
Depreciation = Payment Price ÷ Utilization Age
= Rp. 100,000,000 ÷ 4 years
= Rp. 25,000,000
You can see that the depreciation amount can be found by subtracting the asset’s salvage value from its cost to determine the depreciable amount.
This amount is then divided by the number of years of asset utilization. Then, again divide by 12 to get how to calculate depreciation expense per month.
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2. Decreasing Load Method
This method is used to recognize most of the depreciation of assets at the beginning of their useful life.
This is because the calculation is accelerated where the depreciation expense at the beginning of the year is available and will be lower in the next usage period.
This method of calculating depreciation costs focuses more on the amount of depreciation expense which is more in the initial year of use.
This is because assets will experience depreciation or depreciation in the initial year.
This method is classified into two types, namely the sum of the year digits method and the declining balance method.
3. Number of Years Total Method
This method is a way of calculating depreciation expense by taking the estimated age of the asset and adding up the digits for each year.
This is an accelerated method for calculating depreciation expense.
So, if the asset is expected to last five years, the number of digits of the year will be calculated by adding 5 + 4 + 3 + 2 + 1 to get a total of 15.
Each digit is then divided by this amount to determine the percentage by which the asset must be depreciated each year, starting with the highest number in year 1.
The formula for calculating internal depreciation using the sum of the years digits method is as follows:
Depreciation Cost = (Remaining life of the asset ÷ Total life of the asset) x residual value
To convert this from annual to monthly depreciation, divide this result by 12.
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4. Declining Balance Method
Using the declining balance method, you will need the book value of the asset, so you can multiply it by the straight-line depreciation rate.
Then you multiply that amount by your desired depreciation rate, up to 200 percent.
For objects with a useful life of five years, this will allow you to take on depreciation charges of up to 40 percent in the first year of the asset’s life.
5. Depreciation Based on Usage Method
An alternative to depreciating assets over time is to depreciate assets over their actual use.
After subtracting the salvage value from the book value, you will divide by the estimated total production of the asset over its useful life.
This amount will then be multiplied by the asset’s actual production to determine the accumulated depreciation expense, until the book value equals the residual value.
This calculation method may be useful in cases where a large portion of production may occur later in the life of the asset.
This is because some assets contribute more to income in varying amounts from year to year. Usually this information is in the company’s financial reporting application.
This way of calculating depreciation expense for an asset may be higher or lower in a few years.
In this case, the depreciation expense for each year is based on the units of production or units of output produced by the asset.
An example is the depreciation of the machines that make auto parts.
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Examples of Assets Experiencing Depreciation
The types of business assets that you can depreciate are also known as capital assets.
These items include buildings, property improvements, vehicles, and all kinds of equipment and furniture.
You can depreciate fixed assets used by your business for income generating activities.
The asset must have a defined useful life or utilization and is expected to last more than one year
Meanwhile, there are some assets that you cannot depreciate, including:
- Property that is expected to be used up within one year (such as office supplies).
- Equipment used to build capital increase.
- Certain intangible assets, such as computer software, patents or trademarks.
- You also can’t depreciate land because it doesn’t decrease in value.
So, that was the discussion on how to calculate depreciation costs that you should know and understand.
By understanding the cost of depreciation and the method of calculation, you can measure the total value of your business and minimize tax risk.
Not only that, by knowing the cost of depreciation, you can maximize the life of your assets and know the right replacement time.