Office equipments are classified as fixed assets on the balance sheet and hence, are depreciated accordingly.
A resource is classified as a fixed asset when it has a useful life of more than one year and is expected to generate future economic benefits.
Any office room or building has equipments which are reported as non-current assets on the balance sheet even if they are not directly related to generation of revenue. Following are some examples:
- Computer system
- Telephone system
- Fax machines and printers
- Office desk and chair
- Security system
Which method of depreciation to opt?
We all know that technological equipments and devices lose value rapidly due to obsolescence and introduction of better devices because of technological development in this era.
This means that office equipment such as computer and security system etc should be depreciated through any accelerated methods of depreciation whereas desks and chairs or staplers should be depreciated on the basis of straight-line method.
Example 1: Calculation based on straight-line method (SLM)
Q: Ali has purchased a more comfortable chair for his office on 1st January 2019 at a cost of $500.
He believes that he could sell the metal scrap of the chair for $50 and expects to use it for the next 3 years. Calculate the depreciation expense of Ali for the year ended 2019 using the straight-line method.
A: The formula for calculating annual depreciation through SLM is:
= (Costs – Scrap Value)/ Estimated Useful Life
= ($500 – $50)/3
Ali would charge $150 as a depreciation expense in the year 2019, 2020 and 2021. The amount of depreciation would remain the same since the benefits are equally being distributed throughout its useful life.
Example 2: Calculation based on double declining method.
Q: Ali also bought a computer system at a total cost of $10,000 on 1st January 2019. The residual value is zero. Ali has a policy of charging depreciation at the rate of 20%.
Calculate the depreciation expense for the year ended 2019, 2020 and 2021 that Ali should report in his income statement.
A: The double declining method involves charging a higher depreciation expense in the early years of the life of the asset. It depreciates the asset at a faster rate than the usual straight-line method.
The formula to calculate depreciation through the double declining method is as follows:
Net Book Value * Depreciation rate
Where, the NBV of the asset is cost less accumulated depreciation.
1) Depreciation expense for 2019: $10,000 * 20% = $2,000
(The NBV is $10,000 because cost less accumulated depreciation = $10,000 – $0)
2) Depreciation expense for 2020: $8,000 * 20% = $1,600
(NBV is $8,000 because cost less accumulated depreciation = $10,000 – $2,000)
3) Depreciation expense for 2021: $6,400 * 20% = $1,280
(NBV is $6,400 because cost less accumulated depreciation = $10,000 – $3,600)
Example 3: Calculation based on sum of year’s digits
Q: When Ali commenced his business 2 years ago in 2017 he also bought a security system for his office. It costed him $3,000 with an estimated useful life of 5 years.
Ali expects to dispose of the asset at the end of its useful life for $500. The depreciation method he uses for his assets is the sum of year’s digits. Calculate the depreciation expense that Ali should report in his income statement for the year ended 2019.
A: In SYD method of depreciation, the applicable rate of depreciation is different each year. It is allocated in such a way that a higher expense is charged in the early years of the asset’s useful life.
In order to calculate the depreciation expense we multiply the depreciable amount (cost – scrap value) with the depreciation rate.
The formula for calculating the depreciation rate is:
= (Remaining useful life at the beginning of accounting period/sum of years’ digits) * 100
Hence, the applicable depreciation rate for the year ended 2019 would be:
= [3/ (5 + 4 + 3 + 2+ 1)] *100 = 20%
The depreciable amount is cost less scrap value i.e. $3,000 – $500 = $2,500.
Finally, we can calculate the depreciation expense for the year ended 2019 as follows:
$2,500 20% = $500 (depreciable amount applicable depreciation rate)