How do I Measure Truck Depreciation?
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.
All new cars do lose value as soon as you take them home, but that doesn't mean you shouldn't buy a new car. When I buy a car I am in for the long haul, so I would rather buy a new vehicle that at least starts out in excellent condition, and maintain it. Doing the required maintenance on your car may not slow the depreciation rate, but it will keep your car in good condition for you.
After all, why should you care about how much you can sell your car for when you have no plans to sell it. If you trade cars every 3 or 4 years then that's a different story all together, and you might want to look into buying low-mileage pre-owned vehicles.
I know cars and trucks lose their values pretty quickly, but there is a good market for old pickup trucks. There are many people who are looking for old trucks that they can get into running condition or keep in running condition, so they'll have vehicles to haul stuff around on. You have a much better chance of selling your average 20 year-old truck than you do selling a 20-year-old car.
My father told me that buying a new vehicle is like throwing money away because a vehicle's depreciation rate makes it worth about half of what you paid for it as soon as you drive it off the lot. That's another reason he only paid cash for his cars. He would save until he had enough money to pay cash, so he wouldn't be making payments on a car that was worth less money than he owed on it.
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