Truck depreciation is the decline in the useful life of a vehicle which is considered a fixed asset. It can be measured either by straight-line depreciation or accelerated depreciation. Every fixed asset that a company owns has a certain amount of useful life. Since a truck cannot last forever, its value starts to decrease over time due to wear and tear.
A business must enter truck depreciation on its balance sheet as an expense because it is a fixed asset which loses value each year and must be accounted for. Although the amount of depreciation is not actually paid in cash, the loss must be recorded to balance the books. The two accounts used to record truck depreciation are the accumulated depreciation account and the depreciation expense account. Accumulated depreciation shows the combined total depreciation of a fixed asset. A depreciation expense account records the value of a fixed asset’s depreciation over an accounting period.
Straight-line depreciation is a simple method of calculating the amount lost on a fixed asset over time. A certain percentage of the fixed asset’s value is taken as the amount of depreciation per year. It is calculated by subtracting the estimated final value of the asset from its purchase price; this figure is then divided by the amount of time the fixed asset will be used by the business.
A basic example is as follows: Suppose a truck is purchased for $20,000 U.S. Dollars (USD). The company decides the vehicle will last six years and should have a final value of $2,000 USD. The $2,000 USD would be subtracted from the cost price of $20,000 USD to give a total truck depreciation of $18,000 USD. This figure would then be divided by six to give an annual depreciation of $3,000 USD.
Measuring accelerated truck depreciation is slightly more complicated but should not be a problem for anyone with basic accounting knowledge. When it comes to dealing with vehicle depreciation, it may not be appropriate to presume its value decreases evenly. Trucks lose most of their value in the first few years of ownership.
With accelerated truck depreciation, the value of the vehicle declines by a large amount in the first few years before tapering off to a final salvage worth. Using the above example again, the company may decide to record the truck depreciation as $5,000 USD for the first year and $4,000 USD for the second. The level of depreciation would slow down toward year six with the final value of the truck still estimated at $2,000 USD. This form of depreciation is used to reduce a company’s net income, thus decreasing the amount of income tax paid in a year.