Depreciation is a non-cash expense that is used to write down the value of an asset over its useful life. Accumulated depreciation is the balancing (contra) account. According to the BusinessDictionary, the write down value (WDV), is the "net book value of an asset computed by deducting the accumulated depreciation or amortization from the value shown in the account books (the book value)." In layman's terms, it is the value of the asset adjusted for usage over time.

Decide on a depreciation or write down methodology. For simplicity, let's use the straight line depreciation method which writes down the asset in equal installments according to its useful life. The formula for straight line method is (Purchase Price) / (Years Useful Life).

Define your variables. For this example, let's say you purchased a tractor for your farm at a price of $75,000. The tractor has a useful life of five years.

Calculate year 1 WDV. Divide the purchase price ($75,000) by the useful life (5). The equation is $75,000 / 5 = $15,000. Accumulated depreciation is $15,000 and the WDV is $60,000 ($75,000 - $15,000).

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Calculate year 2 WDV. Subtract the depreciation expense established in Step 3 ($15,00) from the new WDV ($60,000). The equation is $60,000 - $15,000 = $45,000. Accumulated depreciation is $30,000 ($15,000 * 2).

Calculate year 3 WDV. Subtract the depreciation expense established in Step 3 ($15,000) from the new WDV ($45,000). The equation is 45,000 - $15,000 = $30,000. Accumulated depreciation is $45,000 ($15,000 * 3).

Calculate year 4 WDV. Subtract the depreciation expense established in Step 3 ($15,000) from the new WDV ($30,000). The equation is $30,000 - $15,000 = $15,000. Accumulated depreciation is $60,000 ($15,000 * 4).

Calculate year 5 WDV. Subtract the depreciation expense established in Step 3 ($15,000) from the new WDV ($15,000). The equation is $15,000 - $15,000 = $0. Accumulated depreciation is $75,000 ($15,200 * 5).

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