How depreciation is calculated step by step?

a good answer by mr.: abdelaziz alam

There are different ways of calculating the depreciation, what are those and their formula with steps is given below :

     (i) Straight Line Method :- In this method of calculation,  depreciation value is deducted at a fixed value over the whole period of depreciation.

                Formula :- (Cost - Residual Value ) / Useful life  

     (ii) Decling Balance Method :- In this method the depreciation value changes every year over the whole period of depreciation.

              Formula :- Book Value x Depreciation Rate, where Book Value = Cost - Accumulated Depreciation

     (iii) Sum of Years Digits Method :- This method of depreciation is tricky & calculated on the based of age value of the Asset.

               Formula :- (Cost - Salvage Value) x Fraction. If the useful lie is3 years,

            for the1st year fraction will be n/ (1+2+3)

            for the2nd year fraction will be (n-1)/ (1+2+3)

            for the3rd year fraction will be (n-2)/(1+2+3), where 'n' is no. years of useful life   

               If the cost of asset is £1,OO,OOO, & the salvage value is £,1O,OOO then for the1st year it is calculated as

         1st year depreciation will be (£1,OO,OOO-£1O,OOO)x3/6

           2nd year depreciation will be (£1,OO,OOO-£1O,OOO,)x2/6

           3rd year depreciation will be (£1,OO,OOO-£1O,OOO)x1/6 

Determine the useful life of your asset. The IRS publishes this information yearly and makes it available on its website. For example, an automobile carries a useful life of five years.

Retrieve the invoice from the time of purchase. Write down the value not including ancillary charges like delivery, installation or tax. For example, you might have paid $20,000 for the automobile.

Step 3

Divide the value by the useful life. An automobile worth $20,000 with a useful life of five years depreciates by $4,000 per year.

Multiply the depreciation value by the number of years that have passed since purchase. If you've had the car for two years, it has depreciated $8,000.

Subtract that figure from the original value. For a car that was originally $20,000 that is two years old and depreciates at a rate of $4,000 per year, it is currently worth $12,000.

Obtain your latest statement. Note the balance, interest rate, fixed payment and and remaining term.

Multiply your balance by the interest rate. For example, if your balance is $25,000 and your interest rate is 5 percent, multiply $25,000 by .05 to get a figure of $1,250.

Multiply the figure from the previous step by the number of days in the month. For example, if it is January, multiply $1,250 by 31 to get $38,750.

Divide the figure from the previous step by 360. This gives you $107.64, which is the amount of interest you will pay for that month.

Subtract the interest figure from your total payment. If your monthly payment is $471.78, subtract $107.64 from that figure to see that you will pay $364.14 in principal.

Subtract the principal amount from your balance. If you paid $364.14 in principal on a $25,000 loan, you are left with a balance of $24,635.86. This is your amortization for the month.

Repeat Steps 1 through 6, using the new balance and the number of days in the next month. Do this for each month of the year and add the principal payments together. That is your amortization for the year.