4 Steps to Calculate Depreciation using the Straight Line Method

Calculate depreciation using the straight line method using 4 steps. Illustrates straight line depreciation when the asset is placed in service on the first day of the company's fiscal year. Music: http://www.bensound.com/royalty-free-... In this video I'll show you 4 steps to calculate depreciation using the straight-line method. Let's say a business buys office furniture for $23,000. The office furniture is a fixed asset. It will be around for more than one year and so it will be on more than one annual financial. That's where depreciation comes into the picture. We're going to depreciate this office furniture. Let's go to Step 1. Step 1 is to get your facts together. We'll say that this office furniture was put into service on January 1st 2015. It will have a useful life of five years. Its salvage value will be estimated to be $3,000 and in this video we're using the straight-line method. The next step, Step 2, is to calculate the depreciable base which is cost minus salvage value or $23,000 - $3,000 which gives us $20,000 and that's our depreciable base. Step 3 is to calculate the annual depreciation expense. The depreciable base divided by the useful life 20,000 divided by 5 gives us $4,000 of depreciation expense per year. Step 4 is to prepare a depreciation schedule. This is a little more involved so we'll break it up into four parts. The top part, the left part, the accumulated depreciation column and the book value column. The first part, the top part, is our given information from Step 1. For example, we'll write that we have office furniture that we're depreciating for 5 years. The second part of the depreciation schedule, the left-hand side, lists those five years. It also gives us the depreciable cost. Now remember the facts did not change so our depreciable cost did not change. We also put this asset in service on the very first day of the fiscal year of the company and that's why our depreciation expense is $4,000 every year. If we had put this asset into service in the middle of the year, the depreciation expense column would look a little different but that's for another video. The third part of the depreciation schedule is the accumulated depreciation amount. Now remember when we put this asset into service, accumulated depreciation was $0 and we said our expense, our depreciation expense, is $4,000 per year. Take the $0 of the accumulated depreciation and add it to the depreciation expense. We come up with $4,000 and we continue this. $4,000 of accumulated depreciation plus $4,000 of depreciation expense is $8,000. $8,000 plus $4,000 is $12,000 and so on. The fourth part of the depreciation schedule is the book value column. Book value is cost minus accumulated depreciation. At the end of the first year, cost of $23,000 - $4,000 of accumulated depreciation gives us $19,000 at the end of 2016. $23,000 of cost minus $8,000 of accumulated depreciation gives us $15,000 and so on. Before I end the video, let me just point out a few things. If we were to add up all the depreciation expense throughout the years, we come up with $20,000, our depreciable cost. Our ending accumulated depreciation amount is $20,000, our depreciable cost. At any given time, we should be able to deduct the accumulated depreciation from the cost to come up with the book value. And our ending book value is our salvage value, $3,000. I hope you found this video useful. I hope you enjoyed it. Thanks for watching!