The Ultimate Guide to Office Furniture Depreciation: Easy and Straightforward Calculations

Published August 25, 2023

For non-accountants, calculating office furniture depreciation can be confusing. It can also be intimidating. So, some businesses opt to do it the simplest way. They divide the furniture’s purchase cost with its useful life. For example, a company bought office furniture for $100. It is expected to be used within the next five years. In this case, the yearly depreciation is $20. Unfortunately, this calculation isn’t always applicable. 

All assets, including office furniture, depreciate every year. But, not at the same rate. Some will decline faster than others. So it’s critical to understand how each piece of furniture depreciates. It is for you to come up with a more accurate depreciation amount. 

In this article, we’ll provide an easy guide to office furniture depreciation. We’ll let you know that office furniture depreciation doesn’t have to be intimidating. You will understand all of its in and outs in no time. Let’s start.

What Is Office Furniture Depreciation? 

Depreciation of furniture in accounting terminology is the fall or reduction in furniture value. This furniture is any movable asset. It is all that is used to make any room, office, factory, etc, suitable for desired working conditions. The reduction is due to wear and tear use. Moreover, due to the bypassing of time. In other words, it can be defined as part of the furniture cost price. It charges as an expense in one accounting period.

Depreciation explained.

Depreciation is a way of amortizing the value of an asset over its useful life. To illustrate, suppose you expect a cabinet you purchased to be useful for the next ten years. Rather than deducting the entire amount you paid for it as an expense in the year it was bought. You will divide it into ten years. But why? 

Depreciation is based on the Matching Principle in accounting. It states that income and expenses should be recognized in the year they are earned. Also, in the year spent regardless of when they are paid. 

Since you’ll be using the cabinet for ten years, it will help you earn an income within those years. Therefore, you need to divide the expense of the cabinet by the years that you’re earning income from it. By doing this, you’re making sure that your income and expenses will match.

On your part as a business owner, depreciation is valuable. It will help you lower your taxes. It is because it is considered an expense and thus deductible from your taxable income. It can be tempting to declare a large depreciation. But, the IRS limits how much depreciation you can claim in a year. We’ll elaborate more on it later. 

Definition of Terms for Office Furniture Depreciation 

Read the terms below to help you better grasp the concept of depreciation. These are concepts often associated with it. 

1. Asset 

In accounting, an asset means a property that you expect to be useful beyond the fiscal period. It includes land, buildings, and office equipment, among others. 

2. Estimated useful life 

Suppose an asset has an estimated useful life of five years. It means that you expect to use it for five years. Remember that it is just an estimate. Some assets exceed their valuable times. Conversely, others may become useless even before they become fully depreciated. Either way, it’s okay. You can adjust the depreciation as you deem fit. You can also maintain the asset in your books even if it’s fully depreciated. 

3. Salvage value 

Salvage value is the asset’s scrap value. It’s how much you expect to sell when you’re no longer using it. 

How to Calculate Depreciation Expense

There are several ways to calculate depreciation. It is because assets like office furniture depreciate at different rates. Here are some of them: 

1. Straight Line Depreciation 

It is the easiest and most simple way to calculate depreciation. It goes by taking the asset’s purchase price and deducting its salvage value. After, you will divide it by the asset’s estimated useful life. 

The formula: 

Depreciation = (purchase price – salvage value)/ estimated useful life 

Example: 

You bought a cabinet for $1,000 and you expect to use it for the next 10 years. Its estimated scrap value is $200.

Your annual depreciation is $80. This is a uniform annual amount that you will recognize as an expense in the next ten years.

2. Double Declining Balance Depreciation 

Double Declining Balance depreciation is for assets that are less useful overtime. For example, a computer set. You expect to use it in the next 10 years. However, you know that after only 3 years, a new model will come out. Your employees will probably use that computer much less frequently. 

The logic behind this depreciation method is to depreciate an asset in the years when it’s more useful. As a business owner, you’ll also be able to recover the cost of the item much faster.

Under this method, the depreciation amount in the first year you depreciated the asset is doubled. Then in the subsequent years, the asset’s book value is used instead of the purchase price.

The formula: 

Depreciation = (2 x depreciation rate) x book value at the beginning of the year. 

To get the depreciation rate, just divide 1 by the asset’s useful life. Suppose an asset has a useful life of five years. The depreciation rate in this case is 20%. 

Example: 

$1,000 purchase price of a cabinet. It has 10 years of estimated useful life. Since it is depreciated for 10 years, the depreciation rate would be 10%. 

Year 1

After year 1, your book value for the cabinet will only be at $800. It is what you will use for next year’s computation. 

Year 2 

This goes on until the asset is fully depreciated.

3. Sum of the Years Digit Depreciation 

SYD permits you to depreciate an asset more in the first year than the succeeding years. Albeit with a slightly more even distribution.

Under it, you will have to divide the remaining lifespan of the asset over the sum of the year’s digit. Then multiply it by the difference of the asset’s purchase price and its salvage value.

The formula: 

Depreciation = (remaining lifespan / SYD) x (purchase price – salvage value)

To calculate for SYD, just add up all the digits in the asset’s useful life. So if an asset has a useful life of five years, the SYD will be 15 (1 + 2 + 3 + 4 + 5).

Example: 

Using the cabinet example in the last depreciation method, the SYD is 55. It is due to its useful life of 10 years. 

Year 1 

For the first year, you’ll record a depreciation of 128. It is slightly lower than the first year depreciation under the double declining balance. 

Year 2 

Notice that the second year’s depreciation is lower than the first. But the difference is not as dramatic as the double declining balance method.

Furniture Depreciation Life: Depreciation Rates for Furniture

Different prevailing laws prescribe varying rates for furniture depreciation. Generally, under the U.S. prevailing laws, furniture, fixtures, and related equipment life are assumed to be seven years. It is the case if the furniture is used in office locations. Generally, the method of tax depreciation is 200% Declining Balance (D.B.). 

How to Calculate Depreciation for Tax Purposes 

The IRS holds strict standards for depreciation for tax purposes. The agency requires businesses to use the Modified Accelerated Cost Recovery System (MACRS) depreciation method for tax returns.

Under MACRS, assets are assigned to a specific asset class. The class they’re assigned to determines their useful life. So if you’re preparing your tax returns, you can’t just make up a depreciation amount for your office equipment. A detailed table of asset classes can be found in IRS Publication 946, Appendix B.

To familiarize yourself with MACRS, you can access depreciation calculators online. You can also seek guidance from a bookkeeper or accountant. 

Which Office Furniture Can Be Depreciated? 

All office furniture depreciates. But you can only record a depreciation expense for it if you: 

• Own the furniture
• Use the furniture in your business or to produce income 
• Can determine its useful life 
• Expect the furniture to last more than a year

Suppose The furniture doesn’t fit any of the above criteria. In this case, they are not considered depreciable assets. They can’t be subjected to depreciation.