Depreciation work sheets for Business Management

Depreciation is the process of allocating the cost of a tangible asset over its useful life. Assets that are subject to depreciation include buildings, equipment, furniture, and vehicles. In other words, depreciation is an accounting process that measures the decline in value of assets over time. It’s a way to allocate the cost of an asset to each year it was used.

There are two methods of depreciation:

• Straight-line method of depreciation
• Reducing balance method of depreciation

Straight-line method of depreciation

Straight-line method of depreciation is a method in which the asset is depreciated evenly over its useful life. Straight line depreciation is the most common and straightforward type of depreciation. It’s calculated by dividing the total cost of an asset, less its residual value, by its useful life.

Straight-line method of depreciation example

Dee Ltd., purchases a machine for $50 000 with an estimated residual value of $ 10 000 and  a useful life of 5 years.

The amount of depreciation is calculated as follows:

Original cost of the asset: $ 50 000

Cost of the asset – residual value: $ 50 000 – $ 10 000 = $ 40 000

Useful life of the asset: 5 years

So, the annual amount of depreciation is $ 50 000 – $ 10 000 / 5 years =  $ 8 000.

 Reducing (declining) balance method of depreciation

The reducing balance method of depreciation reduces the  depreciation expense for an asset with each accounting period. In other words, more depreciation is charged against the cost of an asset at the beginning of its lifespan, and less is taken at its end

Reducing balance method of depreciation example

Dee Ltd., purchases a motor car $ 10 000. The company decided to depreciate at the rate of 10 per annum. By using reducing balance method, the first 2 years of depreciation calculations would look like this.

Year 1: $ 10 000 X 10 % = $ 1000

Depreciation for the year 1 : $ 1000

Net book value at the end of year 1 $ 9000 ( $ 10 000  – $ 1 000)

Year 2:  $ 9 000 X 10 % = $ 900

Depreciation for the year 2: $ 900

Net book value at the end of year 2: $ 8 100 ( $ 9 000 – $ 900)

The main difference between the reducing balance and straight-line methods of will lie in the fact that while with the first, depreciation is calculated as a percentage of an asset’s book value, with the latter method  the  annual amount of depreciation  remains same  over its  useful life.