Depreciation in the economy and methods of its calculation

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

The concept of depreciation is used today in various areas of human life. So, in a technical sense, the term is equivalent to the process of mitigation, in insurance - to the depreciation of an object. This article discusses depreciation in the economy and how it is calculated.

What is this?

Depreciation in the economic sense is commonly understood as a process that reflects the gradual transfer of the value of fixed assets to the cost of the product that was produced and sold as they wear out (in this case, both material and obsolescence are important).

Thus, in the process of aging of buildings and various structures, cars and production equipment, as well as other fixed assets, cash deductions are activated from the cost of the final product, the main purpose of which is further renewal. Such cash flows are referred to as depreciation charges. For this, depreciation funds are formed, where absolutely all transferred funds are accumulated after the sale of the finished product.

Percentage required for reimbursementthe value of the share of a capital good depreciated during the year is calculated as the ratio of the amount of depreciation deductions made annually to the cost of fixed assets. It is called the depreciation rate.

Let's look at an example

As it turned out, depreciation in the economy serves to transfer the cost of fixed assets to the cost of the finished product. What rate of depreciation is acceptable in this or that case? For example, at a production type enterprise engaged in metalworking, a lathe is used. Its cost is 300,000 rubles, the service life is 30 years. Thus, a calculation is possible that will show that the amount of deductions will be equal to 10 thousand rubles per year (300,000 / 30=10,000).

For this example, you can also calculate the depreciation rate for this machine:

10,000 / 300,000=3.3%.

Depreciation, the formula of which is extremely simple, is usually formed by state bodies by law. This allows you to indirectly control the process of updating the fixed assets of economic structures. Often, this alignment helps to form depreciation funds in the shortest possible time by establishing an accelerated depreciation method (for example, the depreciation rate is not 5, but 25 percent). This is how the state acquires the ability to exempt depreciation deductions from taxes.

Depreciation in the economy and methods of its calculation

Today there are five depreciation methods. It is important to note that the use of eachgrouping of similar items of fixed assets is appropriate during the entire useful life. The latter is understood as the period when the use of the object allows you to receive income or serves to fulfill the goals of the economic structure itself. As it turned out, depreciation in the economy is an indicator that can be calculated in one of five ways.

The most common of these is the linear method (used by 70% of enterprises). It is considered the simplest. The bottom line is that an equal share of the cost of this type of fixed assets is depreciated annually:

A=(C(first)H(a)) / 100, where

A - the amount of deductions annually, C (first) - the initial cost, N (a) - the rate of deductions.

Other methods

The above is fully considered what depreciation is in the economy and why it exists. In addition to the presented method of its calculation, there are other methods. Thus, the reducing balance mechanism provides for the identification of the amount of deductions for the year at the residual value of the object at the starting point of the reporting period and the depreciation rate calculated using the SPI:

A=C (rest)(kH (a) / 100), where k is the acceleration factor.

The method of writing off the cost by the total number of years of the IFS implies the calculation of the annual depreciation amount based on the initial cost of the fixed asset, as well as the annual ratio (in the numerator - the number of years until the end of the service life of the object, and in the denominator - the total number of years of its service):

A=C (first)(T (rest) / (T (T+1) / 2)).

Techniques used less often

Depreciation, the formula of which is presented above, can be calculated in other ways. The write-off method in proportion to the volume of the product implies the production of depreciation charges based on the natural value of the volume of the product in the reporting period and the ratio of the initial cost of the object and the estimated volume of the product or work for the entire useful life:

A=C/B.

As it turned out, depreciation in the economy can be calculated using various methods. The final element of this list is the method of calculation in proportion to the amount of work performed. It is appropriate, as a rule, for vehicles. In this case, depreciation rates are set as a percentage of the original cost of the object for every 1000 kilometers.