What is Equipment Depreciation?

Financial: Depreciation of equipment affects a company's balance sheet, income statement, and cash flow. As assets depreciate, their carrying value decreases, impacting the company's net worth.

Operational Efficiency: Depreciating equipment may become less reliable, require more frequent maintenance, and increase the risk of breakdowns. This can disrupt operations, lead to costly repairs, and affect productivity and customer satisfaction.

Decision-Making: Depreciation also influences decisions related to asset replacement, upgrade, or disposal. Accurate tracking and evaluation of depreciation preventing costly downtime and optimizing investment decisions.

Two commonly used methods for calculating the depreciation of assets are the straight-line depreciation method and the declining balance method. Here's more about each method:

1. Straight-Line Depreciation Method: The straight-line depreciation method evenly distributes the cost of an asset over its useful life. This method is straightforward to follow. The formula for calculating straight-line depreciation is as follows:


Depreciation Expense = (Cost of Asset - Estimated Salvage Value) / Useful Life

• Cost of Asset: The original purchase cost of the equipment.
• Estimated Salvage Value: The equipment's estimated residual or salvage value at the end of its useful life.
• Useful Life: The estimated duration or number of years the equipment is expected to be in service.

For example, if a piece of equipment was purchased for $15,000, has an estimated salvage value of $2,000, and a useful life of 10 years, the annual equipment depreciation expense would be: Depreciation Expense = ($15,000 - $2,000) / 10 = $1,300 per year.

2. Declining Balance Method: The declining balance method, also known as accelerated depreciation, assumes that assets depreciate more rapidly in the early years of their useful life. This method allows for a larger depreciation expense in the early years, gradually decreasing over time. A common declining balance method is the double-declining balance method.

The formula for calculating the double-declining balance depreciation is as follows: Depreciation Expense = (Net Book Value - Accumulated Depreciation) * Depreciation Rate

• Net Book Value: This is the asset's original cost minus the accumulated depreciation.
• Accumulated Depreciation: The sum of depreciation expenses from prior years.
• Depreciation Rate: Typically, twice the straight-line depreciation rate. For instance, if the straight-line depreciation rate is 20 percent, the depreciation rate for the double-declining balance method would be 40 percent.

It's important to note that some accounting regulations or tax laws may dictate the method and rates used for depreciation calculations. Consult an accountant or financial professional who can provide specific guidance based on your jurisdiction and industry.

With Cheqroom's equipment management software, you can track the depreciation of your assets effortlessly. Manually trying to track your assets' depreciation is time-consuming and error-prone. Cheqroom helps you track your asset's entire lifecycle. Create detailed analytical reports, manage your budget, and stay on top of your finances with equipment depreciation tracking. Check out some of our features below.