Depreciation

Depreciation is the reduction in the value of an asset over time, typically due to wear and tear, obsolescence, or usage. Common assets that depreciate in value are cars and other motor vehicles.

Depreciation Formula:

$$V = P(1 - r)^t$$

where:

• $V$ = Value of the asset after t years
• $P$ = Initial value (purchase price) of the asset
• $r$ = Depreciation rate (as a decimal)
• $t$ = Number of years This formula is similar to the compound interest formula but with subtraction instead of addition, because the asset loses value each year.

Example

Example

Depreciation can also be calculated using the straight line method.

$$A=\frac{P-S}{t}$$

where $A$ is the annual depreciation amount, $P$ is the initial value, $S$ is the scrap value and $t$ is the useful economic life.

Example

In general the straight-line method is used for assets that lose value evenly over time such as buildings, furniture etc. The reducing balance method is used for assets that lose more value in early years such as vehicles.