How is depreciation calculated for my asset items?

Understanding Asset Depreciation in Our System

Our system is designed to automatically generate a depreciation schedule for your assets, providing crucial insights into their declining value over time. This schedule is created as long as the necessary financial and lifecycle details are properly configured for each asset.

To ensure your items are depreciated correctly, please confirm these essential fields are set:

• Product's Depreciation Years: The associated product must have a defined useful life (in years). This provides the standard duration for an asset's depreciation.

• Item Purchase Date: The exact date your specific asset was acquired and placed in service.

• Item Initial Cost: The original purchase price, including any costs incurred to make the asset ready for use.

• Item Salvage Value (Recommended): The estimated residual value of the asset at the end of its useful life. While optional, setting this ensures the asset doesn't depreciate below its expected real-world value.

With these details in place, your depreciation reports will be accurate and readily available.

Our Depreciation Algorithm: Straight-Line Method with Proration

Our system calculates depreciation using the Straight-Line method. This method distributes the cost of an asset evenly over its useful life. However, since assets aren't always acquired on January 1st, we also apply monthly proration for the first and last years of an asset's life to reflect its actual time in service.

Let's walk through an example:

Example Asset: "Widget Maker 3000"

Consider an item with the following details:

• Initial Cost: $15,000

• Purchase Date: April 24, 2025

• Salvage Value: $5,000 (This means the asset is expected to be worth $5,000 after it's fully depreciated.)

• Product Useful Life: 10 years

The Calculation Process:

1. Calculate the Depreciable Amount: This is the portion of the asset's cost that will be depreciated. We subtract the salvage value from the initial cost. $15,000 (Initial Cost) - $5,000 (Salvage Value) = $10,000 (Depreciable Amount)

2. Determine Annual Depreciation Expense: We divide the depreciable amount by the asset's useful life in years. $10,000 (Depreciable Amount) / 10 years (Useful Life) = $1,000 per year

3. Prorate the First Year's Depreciation (Partial Year): Since our example item was purchased on April 24, 2025, it was in service for only part of its first fiscal year. For our calculations, we count the full months from the purchase month (April) through December. This amounts to 8 months (May, June, July, August, September, October, November, December).

   • First, calculate the monthly depreciation: $1,000 (Annual Depreciation) / 12 months = $83.33 per month

   • 2025 Depreciation: $83.33 (Monthly Depreciation) x 8 months = $666.64

Complete Depreciation Schedule Example:

Based on these calculations, here's how the depreciation for this item would be recorded year-by-year:

Export to Sheets

The $333.36 recorded in 2035 represents the remaining depreciation needed to reach the full depreciable amount of $10,000. After this, the item's Net Book Value will match its Salvage Value of $5,000, and no further depreciation will be applied.