courses › Accounting

Depreciation

level 35 course

Spreading the cost of equipment over the years it's used.

In your head, jot if needed · no calculator why?

Opens at level 35.

Builds on: Profit Is Not Cash (not open yet)

the lesson

The idea, the techniques and a tip for each skill, right here. The Learn page adds worked examples for every skill and untimed practice.

Read the lesson · about 3 minutes

The idea

Equipment is used for years, so its cost is spread over those years instead of counted as an expense all at once. Each year's share is depreciation. Salvage value is what the item should be worth at the end; only the cost above it is spread.

Book value is the cost minus all the depreciation taken so far.

Depreciation is an expense, so it lowers profit and book value. It moves no cash: the cash moved whenever the equipment was paid for.

Techniques

Straight-line: equal slices

The same amount is taken every year.

Take the salvage value off the cost.
Divide by the years of life.
For a month, divide the yearly amount by 12.

worked example

Example: An oven costs $9,000, should last 4 years, and should be worth $1,000 at the end. What is straight-line depreciation per year?

To spread: $9,000 − $1,000 = $8,000.
Each year: $8,000 ÷ 4 = $2,000.

Answer: $2,000

Book value: what is left

Straight-line depreciation after some years.

Find one year's depreciation.
Multiply by the years that have passed.
Take that off the cost.

worked example

Example: A $10,000 machine with no salvage value is depreciated straight-line over 5 years. What is its book value after 2 years?

Each year: $10,000 ÷ 5 = $2,000.
After 2 years: $10,000 − 2 × $2,000 = $6,000.

Answer: $6,000

Double-declining balance

Twice the straight-line rate, on what is left each year.

The rate is 2 ÷ years of life.
Year 1: the cost times the rate.
Year 2: the rate times what is left after year 1.

worked example

Example: Equipment costs $8,000 with a 4-year life and no salvage value. Using double-declining balance (twice the straight-line rate, applied to the remaining book value), what is depreciation in year 2?

Rate: 2 ÷ 4 = 0.5, or 50%.
Year 1: $8,000 × 0.5 = $4,000.
Year 2: ($8,000 − $4,000) × 0.5 = $2,000.

Answer: $2,000

Tips by skill

TipStraight-line per year: Take the salvage value off the cost, then divide by the years of life.
TipBook value after some years: Find one year's depreciation, multiply by the years passed, and take that off the cost.
TipMonthly depreciation: Take off any salvage value, divide by the years of life, then by 12. Stopping at the yearly amount is the usual slip.
TipDouble-declining balance: The rate is 2 ÷ life. Year 1 applies it to the cost; year 2 applies it to what is left.
TipDoes depreciation use cash?: Depreciation uses no cash this year. It lowers profit and book value by its full amount.

Watch out for

In straight-line, forgetting to take the salvage value off before dividing by the years.
Giving the depreciation taken so far when the question asks for book value.
Applying the double-declining rate to the original cost again in year 2.
Assuming depreciation uses cash. It lowers profit, but the cash moved whenever the item was paid for.

skills · practice stats

From rounds of this course only: box, review and test-out answers are left out. Once a skill has 40 tries, it compares your first 20 tries with your last 20.

Straight-line per year par 17 s not tried yet
worked example
A packaging machine costs $34,500, is expected to last 5 years, and to be worth $3,000 at the end. What is straight-line depreciation per year?

Answer: $6,300.00
1. (Cost − salvage) ÷ life = ($34,500 − $3,000) ÷ 5 = $6,300 a year.
Book value after some years par 20 s not tried yet
worked example
A packaging machine costs $68,000, has a salvage value of $8,000, and is depreciated straight-line over 8 years. What is its book value after 2 years?

Answer: $53,000.00
1. Each year takes ($68,000 − $8,000) ÷ 8 = $7,500.
2. After 2 years: $68,000 − 2 × $7,500 = $53,000.
Monthly depreciation par 16 s not tried yet
worked example
A $18,000 delivery e-bike with no salvage value is depreciated straight-line over 5 years. How much depreciation expense is recorded each month?

Answer: $300.00
1. $18,000 ÷ (5 years × 12 months) = $18,000 ÷ 60 = $300 a month.
Double-declining balance par 20 s not tried yet
worked example
Equipment costs $32,000 with a 5-year life and no salvage value. Using double-declining balance (twice the straight-line rate, applied to the remaining book value), what is depreciation in year 2?

Answer: $7,680.00
1. Rate = 2 ÷ 5 = 40%.
2. Year 1: $32,000 × 40% = $12,800.
3. Year 2: ($32,000 − $12,800) × 40% = $7,680.
Does depreciation use cash? par 12 s not tried yet
worked example
This year's depreciation expense on the packaging line is $11,500. By how much does it reduce the packaging line's book value this year?

Answer: $11,500.00
1. Depreciation spreads the cost of the packaging line over its useful life: it cuts profit and book value by $11,500 this year.
2. Depreciation itself moves no cash; the cash moved whenever the packaging line was paid for.

rest ladder

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