7. Partial Year Depreciation

Let's talk about partial years when we're doing depreciation. On all the stuff we've been doing so far, we've pretty much been assuming you buy it on 1/1, and we're gonna depreciate it for a whole year on 12/31. And that's kinda how we've been doing it so far, but that obviously doesn't happen that way. So what happens if you buy it on 7/1? Well, you don't depreciate for this first part of the year. You only get to depreciate for this part of the year, for the part of the year that you actually owned it. Obviously, you can't depreciate something that you don't own.

That doesn't make any sense. So when you have a partial year, you need to adjust all of your formulas accordingly. And here's how you do that. When you have straight line, what's the formula for straight line? You have cost minus salvage value, also known as your depreciable base, over the useful life. When you have straight line in a partial year, you say cost minus salvage value over useful life times the number of months you owned it over 12. So in this case, we owned it for months 7, 8, 9, 10, 11, 12. So we owned it for six months. So we put the number of months we owned it over the number of months in a year, and that will give us the partial year depreciation expense.

And what you have to remember here is if we say that the useful life is something like five years, but Year 1 is half of a year, then 2, 3, 4, 5. So then when you get down to Year 5, you've only got four and a half years. So you'll have to remember that to get five total years, you have to go to a sixth year because your first year was only half, and so your last year is gonna be half, too. Now, this may not come into play on your test at all, but you should remember that if a useful life is five years and you have to carry the schedule all the way out, make sure you don't just stop at five if the first year was a partial year.

And you should recognize that if at the end of Year 5, your accumulated depreciation does not equal your depreciable base. If your accumulated depreciation does not equal your depreciable base using the straight line method at the end of the fifth year, you should think, "Man, I've either done something wrong or maybe this first year was a partial year." 'Cause remember, the goal is to get all the way down to salvage value, and you should get down to salvage value after five years. It just so happens that the end of Year 5 comes in Year 6.

And partial life on double declining balance method is no different. So double declining balance method is two times the straight line rate, which is one over useful life. So it's two times one over useful life times book value.

But if it's a partial year, you do the same thing. Number of months you owned it over 12, and that gives you your double declining balance partial year. You see the theme here? The reason that we have to adjust both of these is because their formulas are set up to calculate for an entire year. Both of these formulas assume that we're talking about a complete year, 12 months. Now, with the units of production, what's the formula to find depreciation for that? We take units produced during the year, and we multiply that by the cost minus the salvage value over the life in units.

Now, is there anything in this formula that makes you believe that it's calculating a yearly expense? I told you up here that these two were both assuming yearly expense because this useful life, that's in years. So when we do the fractions, it comes out to be per year. This is a life in units. So when we do this fraction, it comes out to be per unit. So if you have a partial year on units of production, this number is gonna be really small. So if it can produce about, let's say, 20,000 units per year, and it's a partial year, then this is gonna be something under 20,000.

Because all you do in units of production is you say, "How many units did I make?" It has nothing to do with the year. You just say, "How many units did I make?" Multiply that times the amount, and that gives you your units of production. It also gives you your units of production for a partial year.

It's units of production and it's units of production for a partial year because it doesn't matter, 'cause we're not saying this formula gives us a dollar per year. So in units of production, the fact that it's a partial year will be represented right here. So the partial year is included in this units number because in a partial year, you're gonna produce far fewer units than you would in a full year.