Depreciation helps businesses space their costs of large items over the useful life of the item. For example, building a new warehouse might cost a company $5 million in one year, but the company would enjoy the use of the warehouse for decades to come. Instead of having a $5 million loss one year and no costs in the following years, companies depreciate the cost of the useful life of the item. Some companies use the 150 percent declining balance method for calculating depreciation, which accelerates the depreciation costs in the early years.
Divide 1 by the number of years in the useful life of the item to find the percentage that would be depreciated each year, using the straight line method. For example, if you bought furniture that would last eight years, you would divide 1 by 8 to get 0.125, or 12.5 percent per year.
Multiply the straight line depreciation percentage by 1.5 (150 percent) to find the percentage per year, based on the 150 percent declining balance method. In this example, you would multiply 0.125 by 1.5 to get 0.1875, or 18.75 percent per year.
Multiply the percentage per year by the value of the item at the start of the year. For the first year, if the furniture was worth $20,000, you would multiply $20,000 by 0.1875 to find you would depreciate it by $3,750.
Subtract the amount of depreciation from the previous value of the item. In this example, you would subtract $3,750 from $20,000 to find the new value to be $16,250.
Repeat Steps 3 and 4 each year until the depreciated value of the item reaches the salvage value.
- Jupiterimages/Comstock/Getty Images