What is the formula for calculating annual depreciation?

The formula for calculating annual depreciation is typically determined by taking the replacement cost of an asset and dividing it by its useful life span. This method, often referred to as straight-line depreciation, allows for a consistent expense to reflect the wear and tear or reduction in value of the asset over time.

Replacement cost represents the amount it would take to replace the asset with a new one, ensuring that the calculation reflects the current value of the asset in the context of its economic utility. By dividing this amount by the useful life span, you arrive at a standardized annual depreciation expense that can be accounted for in financial records. This approach provides clarity and simplicity, making it useful for budgeting and financial planning.

Other potential formulas, such as dividing accumulated depreciation by the item's age or market value by item lifespan, do not provide a consistent measure of annual depreciation and can lead to inconsistencies in financial reporting. Therefore, using the replacement cost and useful life span gives a more accurate representation of depreciation over time.