How to Calculate Depreciation
Depreciation represents the decline in value of an asset over time. Understanding depreciation is essential for accounting, tax planning, and financial analysis.
Straight-Line Depreciation
Annual Depreciation = (Cost - Salvage Value) / Useful Life
Where:
- Cost = Original purchase price of the asset
- Salvage Value = Estimated value at end of useful life
- Useful Life = Expected number of years the asset will be used
Step-by-Step:
- 1
Determine cost and salvage value
Find the original cost and estimated residual value.
- 2
Calculate depreciable amount
Subtract salvage value from cost.
- 3
Divide by useful life
Divide by the number of years.
Worked Examples:
Office equipment
Cost: ₹5,00,000Salvage: ₹50,000Life: 5 years
Result: ₹90,000/year
(500000 - 50000) / 5 = ₹90,000 per year