Depreciation means a loss in value. A depreciation schedule is a chart that shows the loss of value of an asset over a period you have labeled as to its worthwhile life. This chart enables you to make sensible and logical future projections and the ability to track the deducted value of your assets. A depreciation schedule is needed in the financial modeling to forecast the overall value of the organization’s balance sheet (fixed assets), income statement (depreciation expense), and cash flow statement (capital expenditures). The real estate industry needs extensive use of depreciation schedules.
When the financial asset is utilized, depreciation occurs. There are several kinds of assets that a company may use to operate. As the company uses up the asset, the value of the asset begins to degrade and that specific asset loses its value. The rate of losing value is different for different assets and the depreciation chart helps us to calculate the different rates of depreciating assets.
The depreciation schedule will include the following:
- The different types of assets a company has
- The method of depreciation the company has opted
- The collective depreciation which the company has experienced at different times
- It may also include forecasted and historic capital expenditures
How to develop a depreciation schedule?
To take a better start, you need to first develop a structure for the depreciation schedule. You should take start from the sales revenue because it drives the depreciation expense as well as the capital expenditures of a company. Now below this, develop a section for capital expenditures and give a reference of historical capital expense from the available time span. Now you can easily estimate the future capital expenditures by making use of appropriate forecasting estimation. Use your own experience and insight to define the proper forecasting estimation by utilizing the following information:
- The capital expense as a % age of sales
- Fixed recurring amount
- Logical ‘hard dollars’ that a company is expected to suffer when it operates
The type of operations will define the forecast
If the capital expenses are applied as a percentage of the sales, you need to divide the capital expenses by sales. By doing this you will get the number of capital expenditures as a %age of sales. You can utilize these percentages to develop an estimation of the future’s expenses as %age of sales. Now multiply this amount with projected sales to calculate the forecast for the capital expenditures.
Make a section for depreciation expense
Make a section for depreciation expense and reference historical depreciation expense for any given time span. If you have been unable to define the organizational depreciation policies, you should better reflect them from the historical data. Make your own judgment grounded on the business which has been undertaken by the company to choose your assumptions from the following resources:
- Depreciation expense as a %age of the net property, plant, and equipment
- Fixed amount
- Depreciation as an expense as a %age of capital expense
- Realistic growth rate
- Depreciation as a %age of sales revenue
After making these calculations and estimations, if you found out that depreciation has stayed constant then your organization is following a linear depreciation policy. In this situation, you should use depreciation expense as a %age of total PP&E (property, plant, and equipment) or you may simply move forward the recurring depreciation amount.
Summarize your depreciation plan
At the end of your plan, make sure to the breakdown down the total change in PP&E. Start from the beginning of the balance of PP&E, add capital expense, subtract depreciation expense and also subtract sales write-offs. Your final total should be the ending balance of PP&E, which is already the sum of accumulated depreciation.
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