Depreciation and amortization are calculated by subtracting a given asset’s recoverable value from its original cost. Through this method, the cost of that specific asset is also prorated to the asset’s life. While depreciation deals with tangible assets or assets that have a physical form, amortization deals with intangible assets such as patents. So how do you calculate depreciation and amortization exactly?
Depreciation of assets entails knowing how much something originally cost and comparing it to what it make cost today sometimes called “the blue book value.” This is determined usually by figuring out how many more useful years an object- such as a computer- may have. The original cost is then divided by the number of useful years determined to be left. The answer is how much the object depreciates in value each year. After each of the remaining years, that value is subtracted annually to get a general feel for how much the asset may still be worth. Amortization is similar except it deals with assets such as patents, research and anything that is not necessarily physical.
Make sure you also have access to the original invoice concerning the asset and take note of its value. Then divide the value by the useful life. For instance, if you own a small business and the business purchased a vehicle for $25,0000 and the IRS useful life determines the vehicle to be good for about 5 years that means the vehicle depreciates $5,000 each year. Then multiple the depreciation value by the number of years the company has had the vehicle- for instance if for 3 years that would be equal to $15,000. When you subtract this value from the original purchase price you end up with $10,000. That means the vehicle is currently worth $10,000. Make sure you make note of this for all tax purposes.
Both depreciation and amortization are company write-offs and this is helpful for tax purposes and accounting. The IRS annually provides a general list for calculating useful life of things such as loans, cars, computers and more. Check out the IRS webpage for more information concerning how to calculate useful life of certain assets. The same method is used to calculate amortization of intangible assets. If you own a small business or are planning to start one, understand how to calculate depreciation and amortization to keep accounting organized and to ensure peace of mind when it comes to taxes and other filings.
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