accounting and finance's key terms

accounting & finance's basic and advance key term will help a student to understand these subjects: How to Calculate Depreciation Depreciation expense is calculated utilizing either a straight line depreciation method or an accelerated depreciation method. The straight line method calculates depreciation by spreading the cost evenly over the life of the fixed asset. Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset. The required variables for calculating depreciation are the cost and the expected life of the fixed asset. Salvage value may also be considered. Examples of depreciation calculations for both straight line and accelerated methods are provided below. Straight Line Depreciation Method The straight line depreciation method divides the cost by the life. SL = Cost / Life Example: A desk is purchased for $487.65. The expected life is 5 years. Calculate the annual depreciation as follows: 487.65 / 5 = 97.53 Each year for 5 years $97.53 would be expensed. What if there is a salvage value? Declining Balance Depreciation Method The declining balance depreciation method uses the depreciable basis of an asset multiplied by a factor based on the life of the asset. The depreciable basis of the asset is the book value of the fixed asset -- cost less accumulated depreciation. The factor is the percentage of the asset that would be depreciated each year under straight line depreciation times the accelerator. For example, an asset with a four year life would have 25% of the cost depreciated each year. Using double declining balance or 200%, which is the most common, would mean that depreciation expense in the first year would be twice that or 50%. So to calculate the depreciation expense each year the depreciable basis would be multiplied by 50%. Example: A copy machine is purchased for $3,217.89. The expected life is 4 years. Using double declining balance the depreciation would be calculated as follows: factor = 2 * (1/4) = 0.50 Year Depreciable Basis Depreciation Calculation Depreciation Expense Accumulated Depreciation 1 3,217.89 3,217.89 * 0.5 1,608.95 1,608.94 2 1,608.94 1,608.94 * 0.5 804.47 2,413.41 3 804.48 804.48 * 0.5 402.24 2,815.65 4 402.24 402.24 * 0.5 201.12 3,016.77