How to Depreciate Equipment

Step-by-Step Guide

1. 1

   Step 1: Understand the meaning of useful life.

   Any piece of equipment that is expected to last more than one year is considered, in accounting terms, a fixed asset.
   
   Accountants need to know the expected useful life, or how long the equipment is expected to last before needing to be replaced, and its estimated salvage value, in order to accurately calculate depreciation on financial statements.
   
   The types of fixed assets purchased vary from company to company.
   
   Examples include furniture, office equipment, medical equipment and vehicles., Businesses need to match their expenses to their annual revenue.
   
   If they recorded the full cost of a fixed asset in the year it was purchased, the profit and loss statement for that period would be inaccurate.
   
   It is more accurate to spread the cost of that equipment over the period of time during which the business will use it.For example, suppose a company purchases a $75,000 vehicle that will be used for five years.
   
   The company should not record the whole cost of that vehicle in year in which it was purchased.
   
   Since it will use the vehicle for its entire useful life, it is more accurate to spread the cost of the vehicle over a five year period on financial statements. , The IRS has published a table that lists the anticipated useful life of different categories of fixed assets.
   
   This way companies are consistent in the way they are calculating depreciation for different fixed assets.
   
   This table is known as Publication
   946.In this publication, the IRS refers to useful life as the recovery period of a fixed asset.
   
   Vehicles such as cars, taxis, buses and trucks, for example, have a five-year recovery period.
   
   Although a business may own a vehicle for more than five years, the IRS thinks it is not likely to continue to use it for business purposes after five years.
   
   So the IRS allows the business to depreciate the cost of the vehicle over five years.
2. 2

   Step 2: Understand why depreciation is important.

3. 3

   Step 3: Determine the useful life of equipment.

Detailed Guide

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