May 072008
There are several ways of calculating depreciation. Two of the most popular are:
Straight line method
If an asset is bought for £10,000 and it’s useful life is estimated at 10 years (with no residual value at the end of the ten years), then the annual depreciation charge is £10,000 ÷ 10 = £1,000 per year.
Reducing balance method
If an asset is bought for £10,000 and it is estimated that it reduces in value by 25% each year, the annual depreciation charge at the end of year 1 would be £10,000 x 25% = £2,500.
At the end of year 2, it would be (£10,000 – £2,500) x 25% = £1,875
At the end of year 3, it would be (£10,000 – £2,500 – £1,875) x 25% = £1,406.25
