Lesson Corporate Finance: Calculation of the Depreciation Schedule

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The <A HREF="depreciation_1.lesson">depreciation</A> schedule shows the value remaining of the asset after a period and the <A HREF="depreciation_1.lesson">depreciation</A> expense in that period. The format of the <A HREF="depreciation_1.lesson">depreciation</A> schedule is:
<table align=center cellpadding=10>
<tr>
<td><b> Year </b></td> <td> <b>Value of the Asset </b></td> <td><b> Depreciation </b></td><td><b>Cumulative Depreciation</b></td></tr>
</table>
The <A HREF="depreciation_1.lesson">depreciation</A> schedule is constructed differently for <A HREF="methods_of_depreciation.lesson">different methods</A>. The two <A HREF="methods_of_depreciation.lesson">methods of calculating depreciation</A> are discussed below:

<A HREF="Straight_line_method.wikipedia">Straight Line Method</A>: In this methods the value of the asset reduces by a fixed amount every year till the value reaches its salvage value at the end of its life. The formula for calculating the <A HREF="depreciation_1.lesson">depreciation</A> is:
<center>{{{Depreciation = (OriginalValue-SalvageValue)/Time}}}</center>

Example: Make the <A HREF="depreciation_1.lesson">depreciation</A> schedule for an asset with original value = $10,000, Salvage value = 0 and useful life = 5 years.
<table align=center cellpadding=10>
<tr><td><b> Year (End of) </b></td> <td> <b>Value of the Asset </b></td> <td><b> Depreciation </b></td><td><b>Cumulative Depreciation</b></td></tr>
<tr><td>0 </td><td>10,000 </td><td>0 </td><td>0</td></tr>
<tr><td>1 </td><td>8,000 </td><td>2,000 </td><td>2,000</td></tr>
<tr><td>2 </td><td>6,000 </td><td>2,000 </td><td>4,000</td></tr>
<tr><td>3 </td><td>4,000 </td><td>2,000 </td><td>6,000</td></tr>
<tr><td>4 </td><td>2,000 </td><td>2,000 </td><td>8,000</td></tr>
<tr><td>5 </td><td>0 </td><td>2,000 </td><td>10,000</td></tr>
</table>

<b><A HREF="Reducing_balance_method.wikipedia">Reducing Balance Method</A></b>: The formulas for calculation for this method are given in the lesson on the <A HREF="methods_of_depreciation.lesson">Different Methods of Depreciation</A>.

Example: Make the <A HREF="depreciation_1.lesson">depreciation</A> schedule for an asset with original value = $10,000 and Depreciation factor = 40%.
<table align=center cellpadding=10>
<tr><td><b> Year (End of) </b></td> <td> <b>Value of the Asset </b></td> <td><b> Depreciation for the year </b></td><td><b>Cumulative Depreciation</b></tr>
<tr><td>0 </td><td>10,000 </td><td>0 </td><td>0</td></tr>
<tr><td>1 </td><td>6,000 </td><td>4,000 </td><td>4,000</td></tr>
<tr><td>2 </td><td>3,600 </td><td>2,400 </td><td>6,400</td></tr>
<tr><td>3 </td><td>2,160 </td><td>1,440 </td><td>7,840</td></tr>
<tr><td>4 </td><td>1,296 </td><td>864 </td><td>8,704</td></tr>
<tr><td>5 </td><td>777.6 </td><td>518.4 </td><td>9222.4</td></tr>
</table>