Annual depreciation definition
/What is Annual Depreciation?
Annual depreciation is the standard yearly rate at which depreciation is charged to a fixed asset. Depreciation is charged because ongoing asset usage reduces its value over the long term, due to either obsolescence or wear and tear. The depreciation charge is calculated over the useful life of an asset, not including its estimated salvage value.
The depreciation rate is consistent from year to year if the straight-line method is used. If an accelerated method is used, then annual depreciation will spike early, and then decline in later years. The result of annual depreciation is that the reported book values of fixed assets gradually decline over time, unless the assets are replaced on a regular basis.
Example of Annual Depreciation
Coati Corporation owns a lathe that originally cost $10,000. The firm estimates that the lathe will have a useful life of 10 years, at which point it will have no salvage value. It plans to use straight-line depreciation, which means that it will incur annual depreciation of $1,000 in each of the next 10 years.
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FAQs
Can Annual Depreciation Amounts Vary Year to Year?
Annual depreciation amounts can vary depending on the method used. Accelerated methods, such as double-declining balance or sum-of-the-years’-digits, allocate higher depreciation in the early years of an asset’s life and lower amounts in later years. In contrast, the straight-line method keeps depreciation expense the same each year.