Calculation of Depreciation Rate %
The reduction in value of an asset due to normal usage, wear and tear, new technology or unfavourable market conditions is called depreciation. Assets such as plant and machinery, buildings, vehicles and other assets which are expected to last more than one year but not for infinity are subject to depreciation.
Formula of Depreciation Rate
Annual Depreciation rate = (Cost of Asset – Net Scrap Value)/Useful Life
There are various methods to calculate depreciation, one of the most commonly used methods is the straight-line method, keeping this method in mind the above formula to calculate depreciation rate (annual) has been derived.
Related Topic – Why is Depreciation not Charged on Land?
Example
Cost of machine = 10,000, Scrap value of machine = 1,000
Machine’s estimated useful life = 5 years
Annual Depreciation = (Cost of Asset – Net Scrap Value)/Useful Life
Annual Depreciation = (10,000-1,000)/5
= 9,000/5
= 1,800/year (Annual Depreciation)
Rate % = Annual Depreciation/Cost of Asset
(Annual Depreciation in %ge) 1,800/10,000 = 18%
Short Quiz for Self-Evaluation
>Related Long Quiz for Practice Quiz 39 – Depreciation
>Read Journal Entry for Depreciation