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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:
 

  • The basics of depreciation 

  • Depreciation methods

  • The depreciation journal entry

  • How to depreciate assets 

  • Depreciation double-entry

 

Course Modules:

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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:

Depreciation Basics

Straight-Line Depreciation

Net Book Value (NBV)

Reducing Balance Depreciation

The Depreciation Journal

Accumulated Depreciation

The Fixed Asset Register

FREE Online Depreciation Course

Depreciation Explained

Part 1: An Introduction to Depreciation

Module overview:

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  • Course Overview

  • What is depreciation

  • Why is depreciation needed

  • 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 on the balance sheet must accurately reflect the asset's worth. In accounting, if depreciation is not used, the assets will always show at cost price, no matter how old they are. 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:
 

  • Motor vehicles

  • Office equipment

  • Computer equipment

  • Tools and other work equipment

  • Machinery

  • 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, like 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 

  • What is straight-line depreciation

  • Straight-line depreciation examples

  • And more

Straight line depreciation explained

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 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 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 it to 10,000 after five years. 

Net book value explained

Part 3: Net Book Value

Module overview:

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  • What is net book value 

  • How to calculate net book value 

  • Accumulated depreciation basics 

  • 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. 

Reducing balance explained

Part 4: Reducing Balance Depreciation 

Module overview:

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  • What is the reducing balance depreciation method

  • How to use the reducing balance method

  • Examples of reducing balance depreciation 

  • And more

Reducing Balance Depreciation Explained

The reducing balance method is more straightforward 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% annually. The percentage is fixed until the asset is disposed of. For example, a business could depreciate a new computer at 25% a year until the computer is sold or destroyed. 

Reducing Balance Formula

Before I teach you the formula, you must understand the basics of 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 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 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

  • Depreciation double-entry

  • Month-end and year-end depreciation 

  • And more

Depreciation Journals Explained

Accounting for Depreciation

Now that you know how to calculate depreciation using either the straight-line or reducing balance method, how do you post your calculations to the financial accounts?

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Depreciation is posted to the accounts using a journal entry. This can be done at each period-end. If you wish to post depreciation monthly or quarterly, the depreciation is first calculated for the whole financial year and apportioned to periods throughout the year. 

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The journal must account for the depreciation expense (profit and loss) and the accumulated depreciation (balance sheet). 

The Depreciation Journal

The journal for depreciation must account for the depreciation expense, which is shown on the profit and loss statement, and the accumulated depreciation, which is shown on the balance sheet.

 

A typical period-end depreciation journal looks like this:

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Debit - Computer equipment depreciation expense - 150

Credit - Computer equipment accumulated depreciation - 150

Debit - Plant and machinery depreciation expense - 3,500

Credit - Plant and machinery accumulated depreciation - 3,500

Debit - Motor vehicles depreciation expense - 800

Credit Motor vehicles accumulated depreciation - 800

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If you need further explanation, watch the video. 

Accumulated Depreciation

Accumulated depreciation is the depreciation from all periods added together. It is an asset account on the balance sheet. However, it should have a credit balance.

 

New assets are posted to asset 'at cost' accounts, and their depreciation is posted to 'accumulated depreciation' accounts. The 'at cost' minus 'accumulated depreciation' equals the assets' net book value (NBV). 

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For example:

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Excerpt from the balance sheet

 

Tangible Assets

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Computer Equipment at Cost 8,400

Computer Equipment Accumulated Depreciation (2,000)

Plant and Machinery at Cost 15,500

Plant and Machinery Accumulated Depreciation (7,500)

Motor Vehicles at Cost 84,000

Motor Vehicles Accumulated Depreciation (30,000)

Fixtures and Fittings at Cost 4,000

Fixtures and Fittings Accumulated Depreciation (400)

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Total Value of Tangible Assets: 72,000

Bonus: The Fixed Asset Register

Module overview:

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  • The basics of the fixed asset register 

  • Free fixed asset register template 

  • Using a fixed asset register 

  • And more 

The Fixed Asset Register Explained

What is the fixed asset register?

The fixed asset register is a document detailing asset information such as:

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  • Asset identification numbers

  • Asset descriptions

  • Asset locations

  • Asset costs

  • Purchase dates

  • Who is responsible for which asset 

  • Depreciation rates

  • Expected useful life

  • Estimated salvage value

  • Asset replacement dates

  • Depreciation amounts

  • Accumulated depreciation 

  • Net book value

  • Disposal dates

  • Profit or (loss) on disposal

Why is a fixed asset register needed?

Maintaining a fixed asset register is needed for several reasons. These include:

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Compliance - some governmental bodies require entities to keep and maintain a fixed asset register. 

Accessibility & decision-making - it's much easier to review all company assets from a single electronic file than it is physically reviewing each asset owned by the company. 

Preventing theft or fraud - keeping a record of all company assets can prevent assets going "missing" without management being aware. 

Accounting - a fixed asset register can help track, account, and depreciate assets with greater accuracy and ease. 

Free Fixed Asset Register Templates

Below is a free basic fixed asset register template and a more advanced template. 

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