Depreciation Rate

What is Depreciation Rate?

The depreciation rate is the percentage rate at which asset is depreciated across the estimated productive life of the asset. It may also be defined as the percentage of a long term investment done in an asset by a company which company claims as tax-deductible expense across the useful life of the asset. It is different for each class of assets.

Depreciation Rate Formula

The most widely used method of depreciation is the straight-line methodStraight-line MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more. This rate is calculated as per the following formula:

Depreciation Rate per year: 1/useful life of the asset

Depreciation Value per year = (Cost of Asset – Salvage value of Asset)/ Depreciation Rate per Year

Depreciation Rate

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For eg:
Source: Depreciation Rate (wallstreetmojo.com)

Examples

Below are some of the examples to understand this concept better.

Example #1

  • Cost of a Vehicle: $5,00,000/-
  • Scrap Value of Machine: $50,000
  • The useful life of asset: 5 years

Depreciation rate formula: 1/5 = 20%

Depreciation Rate Example 1
  • Depreciation value per year: (500000-50000)/5 = 90,000
  • Thus depreciation rate during the useful life of vehicles would be 20% per year.

Example #2

A company purchases 40 units of storage tanks worth $1,00,000/- per unit. Tanks have a useful life of 10 years and a scrap value of $11000/-. The company uses a Double declining method of depreciationDouble Declining Method Of DepreciationThe Double Declining Balance Method is one of the accelerated methods used for calculating the depreciation amount to be charged in the company's income statement. It is determined by multiplying the book value of the asset by the straight-line method's rate of depreciation and 2read more for calculating the depreciation expense for the tanks.

Thus,

  • The formula as per the straight-line method: 1/useful life of asset = 10%
  • Depreciation period Double Decline Method: Rate as per straight-line method * 2 = 10% * 2 = 20%

Depreciation for subsequent years (considering storage tanks are bought at the start of FY19) is as follows:

Depreciation Rate Example 2

*Depreciation expense for the Year 2028 is kept at 2422 to maintain the salvage valueSalvage ValueSalvage value or scrap value is the estimated value of an asset after its useful life is over. For example, if a company's machinery has a 5-year life and is only valued $5000 at the end of that time, the salvage value is $5000.read more at the end of 10 Years.

For 40 units, the depreciation table will be as follows:

Example 2.1

*Book value is for 40 unit
# Depreciation expense for the Year 2028 is kept at $96,871 to maintain the residual value at the end of 10 Years.

Advantages

Limitations

  • It is usually considered to be constant for the particular class of asset and hence reflects the estimated value of depreciation every year. The useful life of an asset and hence depreciation depends on many other factors like the way an asset is handled, the number of hours it is operated for, the quality of parts of assets, etc. which are not reflected in depreciation rate usually.
  • For assets like IT assets, which are upgraded from time to time, it is difficult to ascertain the actual depreciation rate since the value of assets varies in the middle of the useful life of assets, subsequently changing the useful life of an asset. This further complicates the calculation.

Conclusion

Depreciation Rate is used by the company for calculation of depreciation on the assets owned by them and depends on the rates issued by the Income-tax department. Poor methods of calculation may distort both the Profit and Loss statement and Balance sheet of the companyBalance Sheet Of The CompanyA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more. Hence a fair understanding of the same is very important.

Depreciation Rate Video

 

This has been a guide to Depreciation Rate and its definition. Here we discuss its Depreciation Rate formula and its calculations along with practical examples. You may learn more about accounting from the following articles –

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