Calculating Depreciation in Business

What is Depreciation:
In accounting terms, depreciation is defined as the reduction of recorded
cost of a fixed asset in a systematic manner until the value of the asset
becomes zero or negligible.

An example of fixed assets are buildings, furniture, office equipment,

machinery etc. A land is the only exception which cannot be depreciated
as the value of land appreciates with time.

Depreciation allows a portion of the cost of a fixed asset to the revenue

generated by the fixed asset. This is mandatory under the matching
principle as revenues are recorded with their associated expenses in the
accounting period when the asset is in use. This helps in getting a
complete picture of the revenue generation transaction.
An example of Depreciation – If a delivery truck is purchased a company
with a cost of tk. 100,000 and the expected usage of the truck are 5 years,
the business might depreciate the asset under depreciation expense as
tk. 20,000 every year for a period of 5 years.

How to calculate depreciation in small business?

There three methods commonly used to calculate depreciation. They

are:
1. Straight line method
2. Unit of production method
3. Double-declining balance method
Three main inputs are required to calculate depreciation:
1. Useful life – this is the time period over which the organization
considers the fixed asset to be productive. Beyond its useful life, the
fixed asset is no longer cost-effective to continue the operation of the
asset.
2. Salvage value – Post the useful life of the fixed asset, the company may
consider selling it at a reduced amount. This is known as the salvage
value of the asset.
3. The cost of the asset – this includes taxes, shipping, and
preparation/setup expenses.

Unit of production method needs the number of units used during

production.

Depreciation is an important part of accounting records which helps

companies maintain their income statement and balance sheet properly
with the right profits recorded. Using a good business accounting
software can help us record the depreciation correctly without making
manual mistakes.

-Auddhaya Shabab Salehin