Business balance sheets break down the company’s assets and liabilities in a line-by-line fashion. Common assets for many businesses are buildings and equipment. Buildings and equipment deteriorate over time, however, so their value does not remain constant. To determine a building’s current value, an owner needs to depreciate the value of the building over time. Because a building’s value is not likely to deteriorate quickly, straight-line depreciation is the preferred method. Straight-line depreciation amortizes the value of the asset evenly over the asset’s useful life span.
Determine the service life of the building. Service life is the estimated useful life span of the building. You may need an expert to appraise the useful life of your building if it is not known. Here, assume it is 40 years.
Determine the building’s salvage value. Salvage value is the building’s worth at the end of its useful life. In academic accounting problems, the value is usually given. In practical application, a professional appraisal may be required. Here, assume it is $25,000.
Calculate the depreciable base. This number represents the amount of cost allocated over the building’s service life. It is the cost of the building minus the salvage value. If the building cost $400,000 and the salvage value is $25,000, the depreciable base is $375,000.
Divide the depreciable base by the service life of the building to calculate the depreciation expense each year. Here, the expense is $9,375.
Fill in your balance sheet. On the “Buildings” line in the “Property, Plant & Equipment” section, write the original cost of the building. On the “Less Accumulated Depreciation” line, write the total depreciation costs. The total depreciation costs depend on how old the business is with respect to its service life span.
Subtract the original cost of the building from the accumulated depreciation to determine the building’s book value. For example, assume the building originally cost $400,000 and its depreciable base is $9,375. The building is five years old. The total accumulated depreciation for this particular building is $46,875. The book value of the building is $353,125.