A pro forma income statement differs from a regular income statement in that it is a projection of future revenues, expenses and net income. A regular income statement reports the balances of these accounts for a specified past period, whereas a pro forma income statement forecasts future results. Depreciation is an expense that needs to be reported on the pro forma income statement, which must be calculated beforehand. The straight-line method is most commonly used for calculating depreciation.

## Depreciation

Determine which assets will be depreciated in the future. Any asset that declines in value with usage, such as machinery or equipment, requires the allocation of the cost to periods in which the assets are used.

Determine the useful life of each asset, which is the number of years the asset will provide value. For example, a car might have a usable lifespan of 10 years.

Calculate the salvage value of the asset, which is the residual value. For example, if a car you purchased for $11,000 can no longer be used, you may be able to sell it for its parts. You can contact a scrapyard for an estimate of the price it will pay for the car. If the scrapyard responds with an estimate of $1,000, the residual value is $1,000.

Determine the depreciation expense. Subtract the residual value from the original cost and divide it by the number of its useful years. For example, ($11,000 - $1,000) / 10 = $1,000. The depreciation expense is $1,000.

## Pro Forma Income Statement

Study the previous year’s income statement of the business. Look at subheadings and all sales figures for each product line.

Evaluate this year’s sales to date and compare it to last year’s total sales. Calculate the change in percentage of this year’s sales compared to last year’s. Take the current year’s total sales and divide it by the number of months into the year it was recorded and multiply it by 12 for a yearly figure.

Compare the amount to the total sales for last year, and determine the percentage change. For example, if last year’s total sales were $1 million and this year’s projected sales were $1.1 million, the growth would be calculated by the following equation: ($1,100,000 - $1,000,000) / $1,000,000 x 100 = 10 percent.

Create the pro forma income statement by using the percentage change in sales. For example, multiply all of last year’s items on the income statement by 1.10 to account for the 10 percent increase.

Record the depreciation expense under “Expenses” to take into account any future assets that will be depreciated over time. Modify the pro forma income statement for any realistic assumptions about your business.