How to calculate depreciation of fixed assets

Depreciation spreads a fixed asset's cost over the years it is used. With the straight-line method, subtract the salvage value from the cost and divide by the useful life: the same amount every year. With the declining-balance method, apply a fixed rate to the remaining book value, so the charge is highest in the first years.

What you need before you start

• Cost: the purchase price plus everything needed to get the asset ready for use, such as delivery and installation.
• Useful life: how many years (or months) the company expects to use it.
• Salvage (residual) value: what you expect to sell it for at the end, often zero.
• Start date: depreciation starts when the asset is ready for use, not when it was ordered.

Straight-line method, step by step

1. Subtract the salvage value from the cost. Example: a machine costs EGP 120,000 with a salvage value of EGP 20,000, so the depreciable amount is EGP 100,000.
2. Divide by the useful life. Over 5 years: EGP 100,000 ÷ 5 = EGP 20,000 a year.
3. For a monthly charge, divide the yearly amount by 12: about EGP 1,667 a month.
4. Book value at any date = cost − accumulated depreciation. After 2 years: 120,000 − 40,000 = EGP 80,000.

Declining-balance method

Apply a fixed percentage to the book value at the start of each year. With a 40% rate on the same EGP 120,000 machine: year 1 = 48,000 (book value 72,000), year 2 = 28,800 (book value 43,200), and so on. Stop when the book value reaches the salvage value.

This suits assets that lose most of their value early, such as vehicles and computers. Whichever method you choose, use it consistently for that asset.

The journal entries

• Each period: debit Depreciation expense, credit Accumulated depreciation. The asset account itself stays at cost.
• On sale or disposal: remove the asset's cost and its accumulated depreciation, record the cash received, and post the difference as a gain or loss on disposal.