Depreciation & How To Calculate Remaining Useful Life An Asset - Explained In 60 Seconds

Описание: Trying to get your head around depreciation and how to calculate the remaining useful life of an asset?

Put simply, there are two main types of depreciation and the useful life of an asset is often set by the manufacturer. We’ll look into exactly how these two things affect each other below.

📌 Full guide to depreciation and calculating the remaining life of assets: https://www.business4beginners.co.uk/...

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What is a capital asset?
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A capital asset is an item of property that is not intended for sale. This could be anything from:

Buildings, such as an office;
Stocks and bonds;
Computers or other business equipment.

Whatever the property in question is, a capital asset will be kept within the business unsold, with a useful life longer than a year.

‘Useful life’ here is more than just how long you intend to use the item. It’s actually an accounting term that’s used to value how many years that asset will remain ‘in service’ (i.e. useful) and cost-effective.

The value the asset loses over its lifetime is called depreciation. We’ll cover the various types of depreciation later, as well as how to calculate the remaining useful life of an asset.

How do capital assets affect tax?
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Every year, part of the value of the assets is deducted from your business profits. This is not treated as an allowable expense, so you can’t claim back on this value.

Although capital assets are removed from your profit, this value needs to be added back when working out how much tax you pay.

Although capital assets aren’t an allowable expense, HMRC do offer tax relief through capital allowances.

There’s also a 100% first-year allowance, which lets you claim back the full amount of tax on the first year that you purchased the item.

Depreciation explained
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There are two main types of asset depreciation.

Straight-line depreciation is where the value of a fixed asset is reduced gradually over its useful life. This is the common and default method of depreciation that’s used to calculate the remaining useful life of an asset.

The formula for to calculate straight-line depreciation is:

(Purchase price – salvage value) / Useful life


Accelerated depreciation is similar to straight-line depreciation, except it runs on the assumption that more value is lost in the first few years of an assets useful life, rather than being lost in an even, straight line.

There are two methods of calculating accelerated depreciation. The first is the Sum of the Year (STY) method.

This method requires you to work out a digit called a Sum of the Year before you can work out how much value is lost each year. This is calculated using the following formula:

(Useful life X (Useful life +1)) / 2

Once you have this figure, you will use this calculation to work out the depreciation for each individual year:

Total depreciation x (remaining useful life / Sum of Years digit)

The other method of calculating accelerated depreciation is using the double-declining balance method. This one only involves one calculation:

2 x straight-line depreciation percent x value at the beginning of the year

How to calculate the useful life of an asset
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The useful life of an asset is predetermined by the manufacturer or HMRC guidelines, depending on what type of asset that it is. As a rough guideline:

5-year lifetime use = Cars, computers, printers
7-year lifetime use = Office furniture and fixtures
10-year lifetime use = Water transportation equipment
15-year lifetime use = Land improvements, such as shrubbery, fences, etc

If you’re unsure of the lifetime value of an asset, the best place to look first is via the manufacturer, which may publish lifetime information on the item in particular.

If you’re ever in doubt, just ask your accountant. They’ll be able to sort through the numbers and confusion for you, leaving you more time to focus on your business.


Resources
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Recommended Online Accountants: https://www.business4beginners.co.uk/...
Recommended Accounting Software: https://www.business4beginners.co.uk/...
Basic Bookkeeping For Beginners: https://www.business4beginners.co.uk/...


DISCLAIMER: The information contained in this video is for general information purposes only. Any reliance you place on such information is therefore strictly at your own risk. Always consult with a qualified accountant to get professional advice tailored to your individual situation.

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