# How to Calculate Units of Activity or Units of Production Depreciation Units of Activity or Units of Production depreciation method is calculated using units of use for an asset. Those units may be based on mileage, hours, or output specific to that asset.

For example, units for a truck might be stated in miles driven. For a piece of equipment, units could be how many products the equipment can be expected to produce.

A factor is calculated based on the expected number of units for that asset, rather than the class life of the asset as done for Straight Line and Declining Balance methods of depreciation.

That factor is then multiplied by the actual units used for each year.

Let’s take a look at how that works for with a sample asset. For this asset we determined the appropriate unit of measure is miles. We estimate this truck will be completely depreciated after 100,000 miles.

The first step is to calculate the factor to be applied to the miles. We do that using this formula:

(Cost – Salvage) / Total Units

For our example asset, we determined the units to be 100,000.

(40,000 – 2,000) / 100,000 = .38 per mile. Each mile will be charged at 38 cents.

The next step is to track the actual miles used each year. The first column shows the miles we tracked for this asset. Using the actual miles, we multiply by the factor to determine depreciation expense. Net Book Value is calculated by taking the cost of the asset and subtracted the accumulated depreciation.

We’re going to stop at the end of the third year to prevent you from making a very common mistake. If we applied the factor in the fourth year, here’s what that would look like:

We never want to depreciate an asset below its salvage value.

This asset has a salvage value of \$2,000. That means our Net Book Value should never be lower than that amount. In this example, our Net Book Value is \$860 if we continued with our factor. In the last year of depreciation, we throw out the formula and simply plug in the number that gets us to our salvage value.

Net Book Value after the third year is \$8,460. Subtract the salvage value. The difference between the two is the amount of depreciation in the final year.

\$8640 – \$2,000 = \$6,640

Regardless of the depreciation method used, the ending Net Book Value in the final year of depreciation should always be the salvage value. If the asset has no salvage value, the Net Book Value will be zero when the asset is fully depreciated.

Here’s what that looks like in the table:

For a more examples of Units of Activity depreciation, watch this video:

## What is the Journal Entry to Record Depreciation?

Whether a company records its depreciation monthly or yearly, an adjusting journal entry is made to adjust the balance of depreciation expense and to record the the loss of value of the asset in the accumulated depreciation account.

The journal entry is a debit to Depreciation Expense and a credit to the contra asset Accumulated Depreciation.

For the following example, we’ll assume our sample asset has yearly depreciation of \$2,000, using Straight-line Depreciation.

When the entry is posted to the accounts, Depreciation Expense has increased and Accumulated Depreciation has increased. The new Accumulated Depreciation total then moves to the Balance Sheet where it shows the total reduction in the assets value from the time the asset was purchase. The Depreciation Expense is accumulating, adding up over time.

Assuming that the asset in question has a 5 year useful life and the company uses Straight Line Depreciation, the next year’s entry will be:

The new Accumulated Depreciation amount will be \$2,000 + \$2,000 = \$4,000. The Balance Sheet will now show this:

The Depreciation has Accumulated to \$4,000. The Net Book Value of the asset is now \$6,000. Notice we haven’t touched the original (historic) cost of the asset. We are tracking the loss in value using the Accumulated Depreciation contra asset account.

For more details on calculating depreciation using other methods, check out these articles:

• ## Difference Between Depreciation, Depletion, Amortization

In this article we break down the differences between Depreciation, Amortization, and Depletion, discuss how each one is used, and what the journal entries are to record each. The main

• ## Adjusting Journal Entries | Accounting Student Guide

When all the regular day-to-day transactions of an accounting period are completed, the next step is to check on the balances of certain accounts to see if those balances need

• ## How to Calculate Straight Line Depreciation

Straight-line Depreciation is used to depreciate Fixed Assets in equal amounts over the life of the asset. The basic formula to calculate Straight-line Depreciation is: (Cost – Salvage Value) /

• ## How to Calculate Declining Balance Depreciation

Declining Balance Depreciation is an accelerated cost recovery (expensing) of an asset that expenses higher amounts at the start of an assets life and declining amounts as the class life