Depreciation

A portion of the cost of a business’ capital equipment that may be deducted from annual gross profits as an operating expense. There are several types of accounting methods for determining depreciation including straight line and accelerated. Both assume that the capital equipment has a “useful life” after which time it has only minimal value (salvage value). The cost of the equipment, minus any salvage value, is deducted over the course of its useful life. In straight line depreciation the original cost minus the salvage value is divided by the number of years of useful life into equal dollar amounts. These amounts are deducted each year as an operating expense throughout the useful life period (in some cases five, but more typically ten to fifteen years).

In accelerated depreciation different formulas can be used to provide larger dollar amounts in the early years of useful life. The amount of depreciation deducted as an expense declines over time. Two of the more common types of accelerated depreciation include double-declining-balance depreciation and sum-of-the-year’s-digits depreciation. Each method of depreciation offers particular benefits. Consult your accountant for advice on which is best for your operation.