5 Factors required for accurate depreciation

Aug 21 2012

Depreciation is apportioning the cost of a fixed asset over a period of time instead of deducting the total cost as an expense upon purchase.  Five factors are required in order to produce an accurate depreciation figure. 


The 5 factors needed for depreciation:

1. Date placed in service - If a new asset is placed in service immediately upon acquisition, its date placed in service is simple to establish.  If an asset is added to a register that was already placed in service but originally excluded from the fixed asset register, determining the date placed in service will be more of a challenge, but important for your calculations.

2. Acquisition value - This is referring to an asset's value at the end of its useful life. 

3. Salvage value - Fixed assets are typically recorded at historical cost.  If an asset, such as a building, is of significant value, a more formal appraisal may be required to determine its value.  For assets that have been excluded from the fixed asset register, you may first want to try researching the item's historical cost.  If that information is unavailable, it is permissible to estimate the amount based on a similar asset's value.

4. Estimated useful life - The estimated useful life of an asset refers to the number of years that an asset can be used for its original intent. 

5. Depreciation method - Using the straight-line method to calculate depreciation of fixed assets would consist of the following: Depreciation = Acquisition Value - Salvage Value/Estimated Useful Life.  The asset is written off evenly over the course of its useful life, resulting in equal depreciation from year to year.

For help with accurate depreciation calculations, fixed asset software can efficiently manage depreciation budgeting and forecasting and offer tracking functionality.