Depreciation and depreciation rates in business are accounting terms. When a business buys a fixed assets it will use it for a number of years. Therefore, in accounting, there is a way to expense the cost of the asset over the number of years it’s used. These rules apply whether the fixed asset is paid for in full or on finance.
How to Calculate UK Depreciation
There are two main methods used in the UK to calculate depreciation – the straight line method and reducing balance method. Here are the steps you need to take to depreciate your fixed assets.
Step 1: Work out UK Depreciation Rate
Depreciation rate is based on the estimated useful life of the asset.
Useful life in accounting means to the number of years the asset will be used by the business to generate income.
Example of Depreciation Rate
If you buy a new laptop and expect to keep it for 3 years before it needs replacing. The useful life of the computer is 3 years.
Step 2: Choose UK Depreciation Method
The cost of a fixed asset can be written off against profits over useful life in two different ways:
Straight Line Method of Depreciation
The straight line method is the simplest way to depreciate fixed assets where you write off the asset over the useful life in equal amounts. The calculation is:
Depreciation = Cost of Fixed Asset / Useful Life of Fixed Asset
Example of Straight Line Depreciation:
You have purchased a laptop for £1,000 with a useful life of 3 years. Therefore the laptop will be depreciated at £333.33 per year for 3 years (£1,000/3 years).
Reducing Balance Method of Depreciation
The reducing balance method of depreciation is used if an asset depreciates more at the start of its life compared to the end of its life. It is particularly applicable if you have an asset that loses significant value at the beginning of its life, such as a van or lorry.
In the first year you depreciate the asset by a percentage and then in the following years depreciate the asset at the same percentage based on the remaining value rather than the original cost.
Example of Reducing Balance Depreciation:
You have purchased a company pickup truck for £44,000 and estimate it will lose 30% of its value in the first year.
Depreciation for the first 5 years would be worked out as follows:
|Year||Value||Depreciation (30%)||Book Value remaining|
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