Depreciation Schedule

What Is A Depreciation Schedule?

A depreciation schedule is a table that outlines, for one or more assets, the depreciation of the asset over all the years of its useful life. Depreciation schedules track how much of an asset’s value is depreciated every period, as well as the reduction in an asset’s book value.

To make this division of an asset’s cost over its lifespan, companies can use different depreciation methods, which are mathematical formulas that calculate how much of an asset’s value should be matched to each period.

Any tangible asset that isn’t consumed within a year (such as raw materials) and that doesn’t have an indefinite lifespan (such as land) is subject to depreciation and should be included in the company’s depreciation schedules.

Depreciation is a fundamental part of accounting, and any company must keep a clear record of its assets’ depreciation, as it can have important financial and fiscal implications. The most basic way to keep track of depreciation is through a depreciation schedule.

Knowing how to build a depreciation schedule and what methods to use to depreciate assets is a fundamental skill for anyone working in accounting, finance, or business.

What is Deprecication?

Accrual accounting, universally used in financial reporting, is based on a few fundamental principles, one of which is the matching principle. This principle dictates that expenses should be allocated to the period the corresponding revenue is earned.

A consequence of this principle is that the entire cost of a fixed asset, such as machinery or equipment, is not reported right when it is purchased. This is because the asset will generate revenue beyond the year when it was bought, so its cost must also be matched to these additional periods.

Therefore, this asset must be reported over its useful life through depreciation. The asset’s owner will use a mathematical mechanism known as a depreciation schedule to divide the cost of the asset among the periods of its useful life.

For instance, if a store buys a cash register worth $550 with an expected life of 5 years in 2024, it will not report the entire $550 expense in its 2024 income statement. Instead, it will use a depreciation schedule to allocate the cost of the cash register to the 5 years of its useful life.

Per the U.S. Generally Accepted Accounting Principles (U.S. GAAP), the U.S. Securities and Exchange Commission (SEC) allows companies to use one of four depreciation methods:

• Straight-line
• Declining balance
• Sum-of-years' digits
• Units-of-production

Depending on the preference of the company as well as the nature of the asset, companies will make a decision on which method to use.

Setting Up the Depreciation Schedule

The steps to building a depreciation schedule for a single asset are as follows:

1. Identify the asset
2. Determine the useful life of the asset
3. Decide what depreciation method to use
4. Create the table for the depreciation schedule
5. Calculate the depreciation of the asset

Identifying The Depreciable Asset

The first step to building a depreciation schedule is identifying the asset that needs to be depreciated. 

Most tangible assets that have a lifespan of more than one year are depreciated. This includes, for example, machinery, vehicles, furniture, buildings, etc. 

Crucially, despite being a tangible asset, land cannot be depreciated, as it has an indefinite useful life. Intangible assets, such as trademarks and patents, are amortized as opposed to depreciated.

Determining The Useful Life Of The Asset

Secondly, the useful life of the asset needs to be determined. The best way to determine an asset’s lifespan is to consult IRS Publication 946, which outlines how to depreciate assets and provides guidance on the useful life of various assets.

However, the useful life of an asset can also be estimated by consulting the manufacturer’s specifications or based on how long that same asset type lasted the last time the company purchased it.

Choosing A Depreciation Method

Once the asset has been identified and its useful life determined, a depreciation method must be chosen.

Straight-line depreciation is most suitable for an asset whose value decreases steadily over time, as it spreads out the asset’s depreciation expense evenly over its useful life to reflect this.

For an asset that loses most of its value early on in its useful life, perhaps because new technology renders it obsolete or because it loses a lot of value by being used, a method like declining balance or sum-of-years’ digits depreciation is appropriate.

Finally, an asset that loses value based on its usage, such as units produced or miles traveled, should be depreciated using the units-of-production depreciation method.

Creating The Table

Next, the table for the depreciation schedule must be created.

On one axis of the table should be the years of the asset’s useful life. On the other axis, there should be three headings: depreciation expense, accumulated depreciation, and book value.

The depreciation expense category records how much of that asset’s value was depreciated that year and how much goes into the company’s income statement as the asset’s depreciation.

The accumulated depreciation series records how much of the asset’s value has been depreciated up to and including that year. This is calculated by adding that year’s depreciation expense to all previous years’ depreciation expenses.

The book value category should contain the current book value of that asset, i.e., how much value it still retains. This is calculated by subtracting accumulated depreciation from the asset’s purchase price.

Calculating Depreciation

Finally, once everything has been set up, simply calculate the asset’s depreciation.

Once the asset has been identified, its life span determined, a depreciation method chosen, and the table set up, all that remains is to apply the formula for the right depreciation method to calculate the asset’s depreciation (the value that should go in the depreciation expense column).

If a spreadsheet application such as Excel is being used, the values for the accumulated depreciation and book value categories can be automatically calculated and populated using formulas.

Schedules where several assets are listed will, instead of having a row or column for each of depreciation expense, accumulated depreciation, and book value, contain simply a row or column for each asset’s depreciation expense.

Depreciation Schedule Example

Let’s build a depreciation schedule for a single asset: an office computer.

1. Identify the asset: The asset we will depreciate is an office computer. The computer was bought in 2024 for $550, and at the end of its useful life, we will be able to sell it for $50.

2. Determine the useful life of the asset: According to the IRS, computers are depreciated over 5 years, so that will be the depreciation timespan we will use.

3. Decide what depreciation method to use: For demonstration’s sake, we will use a straight-line depreciation method.

4. Create the table for the depreciation schedule: On the vertical axis, we will have headings for the depreciation expense, the accumulated depreciation, and the book value. On the horizontal axis, we will have each of the 5 years of the computer’s life.

5. Calculate the depreciation of the asset: To calculate the straight-line depreciation of the asset over 5 years, we will calculate:

Depreciation Expense =  (1/5) * (Purchase Price - Salvage Value)

And then calculate the accumulated depreciation and book value according to the following formulas:

Accumulated depreciation (Year i) = Depreciation Expense (Year 1) + Depreciation Expense (Year 2) + … + Depreciation Expense (Year i)

Book Value (Year i) = Purchase Price - Accumulated Depreciation (Year i)

So, for year 1, for example:

Purchase Price - Salvage Value = $550 - $50 = $500

Depreciation Expense (Year 1) = (1/5) * $500 = $100

Accumulated Depreciation = $100

Book Value = $550 - $100 = $450

We repeat this for every year up to year 5, resulting in a completed depreciation schedule as below.

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