# Equipment depreciation

## What is equipment depreciation?

Equipment depreciation is the method of accounting for the loss in value of a piece of equipment over its useful life. It's an accounting method that allows a company to spread out the cost of a piece of equipment over a period of years rather than all at once.

For example, let's say you buy an \$80,000 machine and use it for five years before replacing it with another one (which will also be worth \$80k). If we were looking at these figures alone and not considering any other factors like tax laws or corporate strategy—you could say that each year would cost \$16k instead of \$80k all at once.

## How do you calculate equipment depreciation?

Depreciation is a reduction in value over time. It's calculated by dividing the cost of an asset by its useful life, which is usually determined by accounting standards set forth by the Internal Revenue Service (IRS) or other governing body. Below is the formula for equipment depreciation:

Annual depreciation

=

(total cost - residual value)   ÷

useful life

For example, you would take the total acquisition cost and subtract it from the current residual value. The residual value is sometimes known as the salvage value, and it’s the estimated value of a fixed asset at the end of its useful life.

For example, let’s say you spent \$100,000 on a new machine for your factory. You have had the asset running and in use for 10 years. You find out the residual value is about \$10,000 at the end of 10 years. So you would take \$100,000 - \$10,000 and get \$90,000. You would then take that \$90,000 and divide it by 10 years (which is the machine's useful life), and you would get \$9,000 as your annual depreciation.

## Why is it important to calculate equipment depreciation?

You may be wondering why it's so important to calculate equipment depreciation. The answer is simple: it helps you determine the value of your equipment, which helps you figure out how much to charge for its use and how much money to set aside for repairs.

Let's look at a manufacturing business as an example. This process can help determine whether or not the business owner should purchase new equipment or continue renting from another company (or have a combination of both). If a piece of machinery costs \$10,000 to purchase brand new, or only \$800 to rent for the year (so \$9,600 for 12 months), but has an expected life span of five years and will produce \$10k/year in revenue during its useful life. In this case, it would make sense for them to purchase the equipment brand new, not only because they're covering all their costs but also because they're making money off their investment.

## What are the advantages of calculating equipment depreciation?

Calculating equipment depreciation is an important part of running a business. It helps you plan for the future, justify business decisions and make better choices about what equipment to buy.

If you're looking at buying new equipment, calculating depreciation can help you decide whether it makes financial sense. You can also use it as a basis for calculating your tax bill if you're going to claim any depreciation on your company's accounts.

## What are some tips to remember when calculating equipment depreciation?

When calculating equipment depreciation, there are a few things to remember:

• Remember to deduct the depreciation from the gross income. This will help you determine how much profit or loss your business made during that specific period of time.
• Remember to subtract the depreciation from the gross income. This will give you an accurate representation of how much money was actually earned by selling goods and services in any given quarter or year.