Group depreciation is an accounting method used to calculate and record depreciation for a collection of assets that are similar in nature and have approximately the same useful lives. Instead of calculating depreciation individually for each asset, the assets are grouped together, and depreciation is calculated for the whole group.
This method simplifies the depreciation process and reduces the amount of record-keeping required, especially for companies that have a large number of similar assets, such as a fleet of delivery vehicles or a collection of office computers.
Here are the basic steps to calculate group depreciation:
- Determine the cost of all assets in the group.
- Estimate the useful life of the assets. Since the assets are similar, they should have approximately the same useful lives.
- Determine the salvage value of the assets. This is the estimated value of the assets at the end of their useful lives.
- Calculate the total depreciation expense. This is usually done by subtracting the salvage value from the cost, and then dividing by the useful life.
- Each year, record the depreciation expense and decrease the book value of the assets by the same amount.
One thing to note with group depreciation is that when an individual asset from the group is retired or sold, the accounting can become complex. This is because the book value of the group of assets and accumulated depreciation have to be adjusted to reflect the removal of the retired or sold asset.
Example of Group Depreciation
Suppose a delivery company purchases a fleet of 10 identical delivery trucks at the start of the year, each costing $30,000, for a total cost of $300,000. The company estimates that each truck will have a useful life of 5 years and a salvage value of $5,000 at the end of its useful life.
- Cost of Assets: The total cost of the assets in the group is $300,000 (10 trucks x $30,000 each).
- Useful Life: The estimated useful life is 5 years.
- Salvage Value: The total salvage value of the assets is $50,000 (10 trucks x $5,000 each).
- Total Depreciation Expense: The total depreciation for the group over the 5-year period is calculated by subtracting the total salvage value from the total cost, and then dividing by the useful life. This comes to $250,000 (($300,000 – $50,000) / 5 years).
- Annual Depreciation: Each year, the company would record a depreciation expense of $50,000 and decrease the book value of the fleet by $50,000. After five years, the book value of the fleet would be $50,000, which is the estimated salvage value.
Let’s say one of the trucks is sold after 3 years for $10,000. The book value of the truck at the time of the sale would be $7,000 (original cost of $30,000 minus 3 years of depreciation at $7,600 per year). The sale would result in a gain of $3,000 ($10,000 selling price – $7,000 book value). The book value of the group of assets and the accumulated depreciation would have to be adjusted to remove the sold truck.
This example shows how group depreciation simplifies the depreciation process by treating similar assets as a group, but also how it can complicate things when individual assets are sold or retired.