Learn Depreciation for FREE!
This page contains our free online depreciation course. It will teach you the basics of depreciation and how to use depreciation in accounting.
The Course Covers:
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The basics of depreciation
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Depreciation methods
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The depreciation journal entry
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How to depreciate assets
Course Modules:
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Lesson 1: Depreciation Basics
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Lesson 2: Straight-Line Depreciation
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Lesson 3: Net Book Value
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Lesson 4: Reducing Balance Depreciation
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Lesson 5: The Depreciation Journal
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Lesson 6: Accumulated Depreciation
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Lesson 7: The Fixed Asset Register
To start the depreciation course, scroll down.
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This course is FREE, and no registration is required!
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Jump to:
FREE Online Depreciation Course
Part 1: An Introduction to Depreciation
Module overview:
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Course Overview
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What is depreciation
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Why is depreciation needed
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Which assets are depreciation
What is depreciation?
Depreciation is the process by which an asset loses value over time.
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Most tangible assets lose value. For example, if a company were to buy a new van today, it would likely be worth less in a year. It would be worth even less in five years. This is because the asset is older, has more mileage, and is more used. This is called wear and tear. Because of wear and tear, assets decrease in value over time.
In accounting, why is depreciation needed?
The value of a business's assets is shown on the balance sheet.
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The value of the balance sheet must accurately reflect the asset's worth. In accounting, if depreciation was not used, the assets would always show at cost price, no matter how old they were. This would not be accurate. Depreciation is used to bring down the value of the assets in the accounts in line with their actual value.
Which assets are depreciated?
In accounting, bookkeeping, and finance, tangible assets are usually depreciated. This includes:
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Motor vehicles
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Office equipment
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Computer equipment
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Tools and other work equipment
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Machinery
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Fixtures and fittings
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Land and property are not usually depreciated. These assets generally increase in value over time, not decrease. This is called appreciation.
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Cash and stock are not depreciated.
Tangible assets vs. Intangible assets
Tangible assets such as machinery or equipment can be physically touched and shown. Intangible assets such as websites, patents, contracts, software, images, and goodwill, can't be physically touched and shown.
Part 2: Straight-Line Depreciation
Module overview:
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Depreciation methods
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What is straight-line depreciation
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Straight-line depreciation examples
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And more...
Depreciation Methods
Assets are depreciated using one of two methods: straight-line and reducing balance.
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These methods account for the depreciation (wear and tear) of assets over a period of time.
Straight-Line Depreciation Explained
Straight-line depreciation accounts for depreciation over an agreed-upon period of time, based on an asset's useful life. The depreciation amount is fixed, meaning the asset will incur the same amount of depreciation each year until its value is zero or valued at the expected value at the end of its useful life. This is called salvage value.
For example, if a new computer is expected to have a useful life of four years and cost 1,000, the asset will be depreciated at 250 a year for four years. Confused? More examples are below.
Straight-Line Depreciation Formula
The formula for straight-line depreciation is:
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(Purchase Price - Salvage Value)/Useful Life​ = Straight-Line Depreciation
Straight-Line Depreciation Examples
1. An office desk is purchased for 800. It is expected to last eight years in the business (useful life) and then be disposed of for nil (salvage value).
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Applying the formula, the calculation will be:
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​(800-0)/8 = 100. That is 100 a year.
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The asset will be depreciated at 100 a year for eight years, reducing its value to nil after eight years.
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2. A motor vehicle is purchased for 25,000. It is expected to last five years in the business (useful life) and then be sold for 10,000 (salvage value).
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The calculation will be:
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(25,000 - 10,000)/5 = 3,000. That is 3,000 a year.
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The asset will be depreciated at 3,000 a year for five years, reducing its to 10,000 after five years.
Part 3: Net Book Value
Module overview:
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What is net book value
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How to calculate net book value
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Accumulated depreciation basics
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And more...
Net Book Value Explained
Before I explain the second depreciation method (the reducing balance method), you need to understand net book value (NBV).
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NBV is the value of an asset(s) after depreciation.
For example, an asset purchased for 2,000 with 500 depreciation has a NBV of 1,500 (2,000 - 500 = 1,500). However, the depreciation element of the calculation must be all depreciation accounted against the asset since purchase. Here is an example:
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Asset cost 10,000
Year One Depreciation 2,000
Year Two Depreciation 2,000
Year Three Depreciation 2,000
Current NBV = 4,000
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The total depreciation from all previous periods is called accumulated depreciation. We will discuss this more later in the course.
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The formula for calculating NBV is:
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Asset at cost - accumulated depreciation = NBV.
Part 4: Reducing Balance Depreciation
Module overview:
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What is the reducing balance depreciation method
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How to use the reducing balance method
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Examples of reducing balance depreciation
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And more...
Reducing Balance Depreciation Explained
The reducing balance method is simpler than the straight-line depreciation. In layman's terms, assets are depreciated by a set percentage each period, reducing the balance over time.
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Common reducing balance depreciation rates range from 15% to 25% per year. The percentage is fixed until the asset is disposed of. For example, a business could depreciate a new computer at a rate of 25% a year until the computer is sold or destroyed.
Reducing Balance Formula
Before I teach you the formula, you must first understand net book value (NBV) and accumulated depreciation. Both of these accounting principles are covered in the previous video.
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The reducing balance formula is:​
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Net Book Value x depreciation rate = reducing balance depreciation.
Reducing Balance Examples
Example One
A computer is purchased for 2,000 with a depreciation rate of 25%. The reducing balance depreciation for the next three years will be:
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Year One. 2,000 x 25% = 500.
This is 500 depreciation, leaving a net book value of 1,500.
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Year Two. 1,500 (NBV) x 25% = 375.
This is 375 depreciation, leaving a net book value of 1,125 (asset cost minus accumulated depreciation of 500 and 375).
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Year Three. 1,125 (NBV) x 25% = 281.25
This is 281.25 depreciation, leaving a net book value of 843.75.
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And so on...
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Example Two
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A desk is purchased for 500 with a depreciation rate of 10%. The reducing balance depreciation for the next four years will be:
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Year One. 500 x 10% = 50.
This is 50 depreciation, leaving a net book value of 450.
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Year Two. 450 (NBV) x 10% = 45.
This is 45 depreciation, leaving a net book value of 405.
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Year Three. 405 (NBV) x 10% = 40.50
This is 40.50 depreciation, leaving a net book value of 364.50.
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Year Four. 364.50 (NBV) x 10% = 36.45
This is 36.45 depreciation, leaving a new book value of 328.05.
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And so on...
Part 5: The Depreciation Journal
Module overview:
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Accounting for depreciation
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Depreciation by category
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Month-end and year-end depreciation
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And more...
Coming soon...
Coming soon...
Part 6: Accumulated Depreciation
Module overview:
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Accumulated depreciation explained
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Depreciation categories
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Examples
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And more...
Coming soon...
Coming soon...
Part 7: The Fixed Asset Register
Module overview:
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The basics of the fixed asset register
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Fixed asset register template
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Using a fixed asset register
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And more...
Coming soon...
Coming soon...