Accumulated Depreciation On Sale Of Asset Cash Flow Statement What is Depreciation

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What is Depreciation

Depreciation (depn) is used to measure the decline in useful life of an asset in dollar terms. Measurement is an estimate because the asset may last longer than estimated or vice versa. Its purpose is to help a business better reflect the cost of using an asset (excluding maintenance costs) over the asset’s useful life. Without this measure, the business would show lower profits or even losses for the period in which the asset is acquired and show higher profits in subsequent periods when the asset is used for the business.

Accumulated depreciation is the total decrease in the value of the asset since the asset was purchased. Assuming you have an asset that you purchased for $9,000 and has an estimated life of 3 years. It’s been two years. The accrued expenses are therefore two-thirds of the purchase price, or $6,000. Using this, you will be able to calculate the book value or residual value of the asset. Continuing with our example, the book value would have been $3,000 because the asset has approximately one year of useful life remaining.

After 3 years, you can continue to use the property at “zero cost”. You can continue to use the asset and your net profit (which is the amount after deducting cost of goods and operating cost) will increase by the amount of depn. While this is not ideal, we are better off realizing the full cost of the purchase in one year.

The most common method of Depn is the straight line. The useful life of the asset is first estimated. The cost of the asset is then divided equally (usually by month) over the useful life of the project and will be the depn value. For most assets, there are already statutory standards or recommendations for their useful life. Most businesses simply follow these statutory standards. For example, the general rule is to depreciate computers and computer equipment over a period of 3 years. Other methods of depn include sum-of-the-year-digits and double-declining balance. The depn method to be adopted for a particular asset is usually determined by how its value changes over time.

Depreciation can be a major contributor to a company’s profit and loss, especially for businesses that require large capital investments. For example, in a telecommunications company (telco), the telco must invest heavily in its telecommunications network before it can serve customers. This network once invested can be used by the telco for many years for its services. It is therefore important for the telco to discount this cost over its useful life so that the company can reflect the true cost of providing the service to its customers. In this case, it is important for the telco business analyst to ensure that the depn is accurately calculated while setting up the business model or it can completely distort the profitability of the business.

Calculating depn in an Excel based business model is relatively easy if you have a good understanding of Excel worksheet functions. Instead of using a 36 column by 36 row table to calculate depn for an asset with a useful life of 3 years, you need to use some formula and one row to calculate depn. Click this discount link to find out how!

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