How To Calculate Partial Depreciation For Straight Line Depreciation Explained

In this video we discuss how to calculate and create a depreciation schedule for partial depreciation using the straight line method. We go through a detailed example Transcript/notes (partial) The straight-line method for depreciation tries to distribute the same amount of expense to each period of time. As an example, let’s say that a company purchases a piece of equipment for $3000, the useful life is 5 years, the salvage value is $500, and the company applies the straight-line method for depreciation. The purchase is made on April 6th. What is the depreciation schedule? Since the purchase is not made at the beginning of the year, we are going to have to use depreciation for partial years for the depreciation schedule. To do this, we must know 3 things, the purchase cost of the equipment or asset, the useful life of the equipment or asset, and the residual or salvage value of the equipment. The formula for depreciation expense for the straight-line method is, depreciation expense each year equals, the cost minus the residual or salvage value, divided by, the useful life in years. Plugging into the formula, we have, $3000 minus $500, the salvage value, divided by 5 years. And this calculates to $500 as the depreciation expense each year. Now we are going to create a depreciation schedule. And we are going to put 4 columns in it, end of year, depreciation expense for year, accumulated depreciation at end of year, and the book value at end of year. For the end of year column, this is simply 1, 2, 3, 4, and 5, for the 5 years of useful life of the asset. But, we actually need to put in a 6th year. Put in a diagram here. Since the purchase was made in April of the 1st year, we have depreciation from April through December of year 1. All of year 2, all of year 3, all of year 4 and all of year 5. And we still have 3 months of depreciation we need to account for to reach a full 5 years of depreciation. So, we will need to claim this 3 months of depreciation in year 6. For the second column, the depreciation expense for year, we just calculated that this is $500 per year, however, the $500 depreciation expense is for a full year, 12 months. And, as was just mentioned, since the purchase was made on April 6th, we cannot claim that full $500 for the first year. So, we need to calculate this partial year depreciation. The formula to calculate this is partial year depreciation equals, the yearly depreciation amount, times the number of months of depreciation, divided by 12. In our example, the purchase was made on April 6th, so, we can claim depreciation for April through December, which is 9 months. Using the formula, we have $500 times 9 divided by 12, which calculates to $375. So, that is the partial depreciation for year 1, and we can put that into the schedule. And one note, to claim the full month of depreciation in year 1, the purchase of the asset must be made before the 15th of that month. So, if our purchase was made on the 17th of April, we would have to claim May through December for year 1. We claimed 3 months of depreciation in year 1, so, we need to claim 3 months of depreciation in year 6, to reach the full 5 years of depreciation. We again use the partial depreciation formula, partial year depreciation equals, the yearly depreciation amount, times the number of months of depreciation, divided by 12. So, we have $500 times 3 divided by 12, and this calculates to $125, so we can put that figure into the schedule, and this column is complete. For the third column, accumulated depreciation at end of year, this is the total amount of depreciation accumulated at the end of each year. So, at the end of year 1, the total amount of depreciation will be $375. At the end of year 2, the accumulated depreciation will be the depreciation for year 1 and year 2, so, $375 plus $500, which is $875. At the end of year 3, the accumulated depreciation will be the depreciation for year 1 plus year 2, plus year 3, so, $375 plus $500, plus $500, which is $1375. And at the end of year 4, it will be $1875, and after year 5 it will be $2375. Now for the last column, the book value at end of year. This is the original cost of the asset minus the accumulated depreciation at the end of the year. So, the book value at the end of year 1 will be the original cost of $3000 minus the accumulated depreciation at end of year 1, $375. Which equals $2625. Chapters/Timestamps 0:00 What is the straight line depreciation method? 0:10 Example set up 0:34 3 things you need to know 0:49 Formula for straight line depreciation 1:15 Depreciation schedule layout 1:27 1st column, years 2:00 2nd column, depreciation expense 2:22 Formula to calculate partial depreciation 2:52 What is a full month of depreciation? 3:42 3rd column, accumulated depreciation 4:47 4th column, book value at end of year 5:32 Book value matches salvage value? 5:42 Another example