Depreciation is an accounting term that refers to the allocation of cost over the period in which an asset is used. In a business, the cost of equipment is generally allocated as depreciation expense over a period of time known as the useful life of the equipment. You can calculate the depreciation of business equipment if you know the original cost of the equipment, the expected residual or salvage value of the equipment and the expected useful life of the equipment.
Determine the original cost of the equipment. For example, assume the cost of the equipment was $100,000.
Determine the residual value of the equipment. Residual value is the salvage value you expect to receive by selling the equipment at the end of the equipment's useful life. For example, assume that the residual value of the equipment is $10,000.
Subtract the residual value from Step Two from the original cost in Step One. Continuing the same example, $100,000 - $10,000 = $90,000.
Determine the useful life of the equipment. The useful life is the number of years you expect to use the equipment. For example, assume the useful life of the equipment is 10 years.
Divide the figure from Step Three by the useful life from Step Four. Continuing the same example, $90,000 / 10 = $9,000. this figure represents the yearly depreciation on the equipment.