Asset Depreciation Calculation
Depreciation spreads asset cost over its useful life. Using straight-line method, annual depreciation equals (cost - salvage value) / useful life. A $50,000 asset with $5,000 salvage value over 10 years depreciates $4,500 annually. Depreciation is a non-cash expense reducing taxable income while reflecting asset value decline.
Different assets have standard useful lives - vehicles 5 years, computers 3-5 years, equipment 7-10 years, buildings 27.5-39 years. Salvage value is estimated resale value at end of useful life. Other methods include declining balance (accelerated) and units of production (based on usage), but straight-line is simplest and most common.
Depreciation reduces taxes but doesn't affect cash flow - it's an accounting entry, not a payment. Track accumulated depreciation (total to date) and book value (original cost minus accumulated depreciation) for financial reporting. Depreciation helps match asset costs to revenue generated over time.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Depreciation applies to physical assets (equipment, vehicles, buildings). Amortization applies to intangible assets (patents, trademarks, software licenses). Both spread cost over useful life, but apply to different asset types.
No, land isn't depreciated because it doesn't wear out or become obsolete. Buildings depreciate but land doesn't. If you buy property for $500,000 ($100,000 land, $400,000 building), only depreciate the building portion.
Depreciation is a deductible expense reducing taxable income. If you're in 25% tax bracket and depreciate $10,000, you save $2,500 in taxes. It's a non-cash deduction - you don't pay anything but reduce tax liability.