Depreciation Rate

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Depreciation Rate?

The depreciation rate is the percentage rate at which an 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 that the company claims as a tax-deductible expense across the asset’s useful life. It is different for each class of assets.

Depreciation Rate Formula

The most widely used method of depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more 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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Source: Depreciation Rate (wallstreetmojo.com)

Depreciation Rate Explained in Video

 

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.

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Example #2

A company purchases 40 units of storage tanks worth $1,00,000/- per unit. 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 method to calculate the tank’s depreciation expense. Tanks have a useful life of 10 years and a scrap value of $11000/-.

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 valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed.read more at the end of 10 Years.

Advantages

Limitations

Conclusion

The depreciation rate is used by the company for the calculation of depreciation on the assets owned by them and depends on the rates issued by the Income-tax department. Poor calculation methods 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.

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

Reader Interactions

Comments

  1. Rai Moses says

    Really enjoy,.such a great help to clear my understanding.thanks big time.

  2. Collins says

    Well simplified for non professional’s understanding.

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