Businesses in any fields also face critical challenges in aligning accounting methodologies with the demands of the comparatively stringent requirements of their target market, the government, accounting system and regulations.
Depreciation of fixed assets is one of those challenges. How to depreciate tangible assets in the easy and readible way? Which method should you choose to meet your requirements? Depreciation methods vary for tax and accounting purpose as well as between asset types in your business. Today’s article, S4B will detail the “straight – line depreciation method” and show some steps that help you to deal with it!
In the previous post, we talked about the difference between depreciation and amortization. We know that depreciation is a non-cash expenditure, meaning that no money was actually paid when expenses were incurred. In financial statement, depreciation is recorded to allocate the loss in value of machines, buidings, equipment, or vehicles that company has purchased. According to Accountingtools.com, “Straight line depreciation is the default method used to recognize the amount of a fixed asset evenly over its useful life. It is employed when there is no particular pattern to the manner in which an asset is to be utilized over time.” Straight – line seems to be the easiest and most commonly used depreciation method to calculate and results in few calculation errors. Thus, it is highly recommended in accounting and tax.
How to do depreciate a fixed asset by straight – line method?
Step 1: Determine the initial cost of the fixed asset and subtract the estimated salvage value of the asset from the amount at which it is recorded.
When an item is purchased, you must categorize that one is tangible (fixed asset) or intangible asset. If it is fixed asset, save the invoice and record its initial cost. Then, you should subtract the salvage value which an owner is paid for when the item is sold at the end of its useful life.
Step 2: Estimate the useful life of the asset:
Once you’ve determined which assets are worth depreciating, you estimate the useful life of those assets before replacing or selling them. One of the most common ways to estimate this value is to use a standard useful life for each class of assets. In other hands, you can realize the number of years you will use those assets based on the warranty period plus several years according to your own experience.
Step 3: Divide the initial cost by the asset’s useful life
Follow this formulas:
Depreciation = Initial Cost of Fixed Asset / Useful Life of Fixed Asset
Steps involved in calculating it is very easy and quick enough that an ordinary person can understand easily. However, there are some disadvantage of this method that we realize through experiences. For example, an asset goes through the equal amount of depreciation every year while it is not invested anywhere outside or it is ceased for period of time.
At S4B, we provide a dedicated team of accounting professionals ranging from an accounting software specialist, an accounting manager to a full-charge bookkeeper… who suit your business needs.