Depreciation expense allows businesses to recover the value of assets or income-producing property that expires over time and through use. Depreciation is calculated for general ledger and tax purposes using various methods; however, the most common (and simplest) general ledger depreciation method is the straight-line method.
Calculate the Annual Depreciation
Determine the asset's total cost. The original cost includes the invoice price plus installation costs, sales tax, and other expenses incurred to purchase, transport and prepare the asset for operations. Let's assume that a printing company has purchased a printing press with an invoice cost of $16,000 with sales tax of $1,200, freight costs of $1,800 and installation fees of $1,000. The total asset cost is $20,000.
Determine the asset's salvage value. This amount is the residual value the asset is estimated to have at the end of its useful life before it is sold, traded or disposed of. Let's assume the printing press is estimated to be sold for $5,000 after it is no longer used for operations.
Subtract the asset's salvage value as calculated in step 2, from the total cost, or purchase price, of the asset as calculated in step 1. The depreciable cost basis of the press is $15,000, the total cost of $20,000 minus the salvage value of $5,000.
Determine the asset's useful life. The useful life is the estimated number of years the asset will be used in operations. Let's continue the example as outlined in step 1 and estimate a useful life of five years for the modern, state-of-the-art printing press.
Calculate the asset's depreciation. Divide the asset's depreciable base as calculated in step 3 by the asset's useful life as determined in step 4. The annual depreciation you will expense to your general ledger is $1,500.