When preparing financial statements for a business that owns certain types of assets, it is common practice for accountants to use generally accepted accounting principles, or GAAP, to depreciate the assets. One of the GAAP methods for calculating depreciation is the “straight-line” method, which depreciates an asset in equal amounts over the expected life of the asset. Accountants then report the depreciation expense on the income statement. You can calculate the accumulated depreciation expense by totaling the depreciation expense for all years currently recorded on the company's financial statements.
Determine the value of the asset. For example, assume your company purchased a piece of machinery for $100,000.
Determine the useful life for the asset. For example, assume the estimated life of the asset is 20 years.
Divide the value of the asset by its expected useful life. Continuing the same example, $100,000 divided by 20 years equals $5,000. This figure represents the annual depreciation expense you would record on the income statement.
Determine the number of years the asset has been in use. For example, assume the asset has been in use for five years.
Multiply the annual straight-line depreciation expense by the number of years the asset has been in use. Continuing the same example, $5,000 multiplied by 5 years is $25,000. This amount represents the accumulated depreciation expense for the asset.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
- Accounting Coach: Depreciation; Harold Averkamp