Accountants use depreciation on financial statements to divide the cost of large purchases among several years. Rather than list the purchase as a single investment or loss, statements mention parts of the price across several consecutive years. Each year deducts a depreciated price from the total cost, leaving an increasingly small book value for the item. Depreciating the cost over several years maximizes the amount that you can deduct from your tax liability.
1. Estimate the item's salvage price, which is the expected selling price when you no longer need the item. In some cases, you might plan to use an item until it breaks down completely, in which case it will have a salvage price of $0.
2. Estimate the number of years for which you will use the item. For example, you might estimate that a new chiller will work for 10 years.
3. Subtract the item's salvage price from the acquisition cost, which is the price you paid for it. If the chiller cost $2,000 initially, and you estimated that you can sell it after 10 years for $400, then calculate $2,000 - $400 = $1,600.
4. Divide the difference by your estimate from Step 2: $1,600 ÷ 10 = $160. This is the size of the depreciation that you can list on each year's statement.
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