How to calculate depreciation of fixed assets: 9 steps to effectively reduce interest expenses.

Whether you're an accountant, a business manager, or simply want to understand long-term expenses, calculating depreciation of fixed assets is often a confusing issue. Depreciation is the process of allocating the value of an asset over its useful life, helping you know exactly how much expense needs to be recorded each period and how much asset value remains.

This article will explain the concept of depreciation in an easy-to-understand way , clarify the nature of asset value allocation, and teach you the common depreciation calculation methods applied in accounting and financial management. Whether you are an accountant, a small business owner, or just starting to learn about finance, this content will help you understand quickly, remember for a long time, and apply immediately.

Part 1: How to calculate the first month's interest and principal on a loan

Step 1: Information needed to calculate loan amortization

1. The principal amount of the loan

• The principal amount is the amount you currently owe , excluding accrued interest.

• For example: If you take out a 30-year mortgage and your current outstanding balance is $100,000, then $100,000 is the principal amount used for depreciation calculation.

• This forms the basis for determining the interest payable in each period.

2. Interest rate of the loan

• Interest rates are usually stated as annual rates (e.g., 6%/year).

• When calculating monthly depreciation, you need to convert the annual interest rate to the monthly interest rate by dividing it by 12.

• Interest rates directly affect the ratio of interest to principal in each payment period.

3. Loan term

• The loan term is the total number of repayment periods .

• For example: A 30-year loan is equivalent to 360 months .

• When calculating depreciation on a monthly basis, the term is always converted to months , not years.

4. Monthly payment amount

• This is the fixed amount you have to pay to the bank each month .

• For example: You pay $599.55 USD per month.

• Although the total payment amount remains unchanged,

  • Initial phase: mostly interest income.

  • Later on: the proportion of principal gradually increases , while interest gradually decreases.

5. Principles of principal and interest allocation

• Each payment period includes:

  • Interest = Remaining principal × Monthly interest rate

  • Principal = total amount paid - interest

• As the principal decreases over time, the interest payable also decreases .

Step 2: Create a simple and easy-to-apply loan depreciation schedule.

1. Create a spreadsheet with basic columns.

• Prepare a spreadsheet and title the columns as follows:

  • Beginning principal balance

  • Interest payable

  • Principal payment

  • Ending principal balance

• Each row corresponds to a monthly payment period .

2. Determine the number of lines required.

• If the loan has a 30-year term, you will need:

  • 360 lines below the headings

  • Each line represents one month during the loan period.

• This helps you keep track of your loan depreciation schedule on a monthly basis .

3. Enter the calculation formula once.

• When the formula is set up correctly:

  • Interest = Beginning principal balance × monthly interest rate

  • Principal = Monthly payment - Interest

  • Ending balance = Beginning balance - principal

• You only need to enter the formula once in the first month .

4. Copy the formula for the entire loan term.

• After entering the correct formula:

  • Drag the formula down to the lines below.

  • The spreadsheet will automatically calculate depreciation for the entire life of the loan.

• This is why spreadsheets make calculating depreciation faster and less prone to errors compared to manual calculations .

5. Separate the important variables.

• A separate area should be reserved in the table for entering the following:

  • Monthly payment amount

  • Interest rate

  • Loan term

• This method helps you:

  • Easily adjust assumptions

  • Quickly see how interest and principal change as parameters change.

6. Cases where spreadsheets are not used

• If you are not familiar with Excel, you can use:

  • Online loan depreciation calculator

• However, a spreadsheet is still a better option if you want:

  • Understanding the essence in depth

  • Proactively manage and analyze long-term cash flow.

Step 3: How to calculate the interest for the first payment period

1. Understand the principle of calculating interest on a monthly basis.

• Depreciation loans are always repaid monthly .

• Therefore, interest and principal must be calculated separately for each month , not directly using the annual interest rate.

2. Convert annual interest rates to monthly interest rates.

• Recipe:

  • Monthly interest rate = Annual interest rate ÷ 12

• For example:

  • Annual interest rate of 6%

  • Monthly interest rate = 6% ÷ 12 = 0.5%/month (or 0.005)

3. Determine the opening principal balance.

• This is the amount you still owe at the beginning of the first month .

• For example:

  • Initial principal balance: USD 100,000

4. Calculate the interest payable for the first month.

• Interest calculation formula:

  • Interest = Principal balance × Monthly interest rate

• Let's apply this example:

  • 100,000 × 0.005 = 500 USD

• So:

  • $500 is the interest for the first month.

5. A general formula that's easy to remember.

• The following formula can be applied:

  • I = P × r × t

  • In there:

    • I: interest

    • P: principal

    • r: interest rate (per month)

    • t: time (1 month)

Step 4: How to calculate the principal amount in the first payment period

1. Principles for calculating monthly principal payments

• Each monthly payment always consists of two parts:

  • Interest

  • Principal

• The total monthly payment is fixed , but the principal-interest ratio will change over time.

2. Formula for calculating principal amount for the month

• Simple recipe:

  • Principal = Total monthly payment − Monthly interest

• This formula applies to all installment loans repaid using the depreciation method.

3. Apply it to a specific example.

• Monthly payment: $599.55

• First month's interest: $500

• Principal payment in the first month:

  • 599.55 - 500 = 99.55 USD

• So:

  • $99.55 is the principal amount paid in the first month.

4. What happens in the following months?

• When you pay off the principal in installments:

  • The principal balance decreased.

  • Interest calculated on the principal balance also decreases accordingly.

• The result is:

  • Each month, the interest gradually decreases.

  • The principal amount accounts for an increasingly larger proportion of the payment.

5. Practical implications of tracking principal

• To help you:

  • Understanding the loan depreciation schedule

  • Know when a loan is "running fast" toward the principal.

  • Proactively consider making a down payment to reduce the total interest payable.

Step 5: How to calculate depreciation for the second month from the new principal balance.

1. Determine the opening principal balance for the second month.

• The new opening principal balance is calculated as follows:

  • Original principal balance – principal amount paid in the previous month

• Let's apply this example:

  • 100,000 − 99.55 = 99,900.45 USD

• This is the original balance at the end of January , and also the balance at the beginning of February .

2. Calculate the interest payable for the second month.

• Recipe:

  • Monthly interest = Beginning principal balance × monthly interest rate

• Apply:

  • 99,900.45 × 0.005 = 499.50 USD

• Compared to the first month:

  • Interest payments have decreased slightly due to the lower principal balance.

3. Repeat the process for the following months.

• Each month, you follow this sequence:

  • Update the new principal balance.

  • Calculate the interest on that outstanding balance.

  • Determine the principal amount by subtracting the interest from the monthly payment.

• This is the core principle of the monthly loan depreciation schedule .

4. Practical implications to note

• Later on:

  • The principal balance decreases

  • The lower the monthly interest rate

• This explains why:

  • In the initial phase, you pay more interest.

  • In the later stages of the loan, the principal "runs faster".

Step 6: How to determine the principal amount to be paid in the second month.

1. Principle for calculating principal in the second month

• The monthly payment remains constant.

• The principal amount is determined by:

  • Get the total monthly payment amount.

  • Subtract the interest for that month.

• The remainder is the principal amount to be paid in installments.

2. Calculate the principal for the second month.

• Total monthly payment: $599.55

• Interest for the second month: $499.50

• Principal payment due this month:

  • 599.55 − 499.50 = 100.05 USD

3. Comparison with the first month

• First month:

  • Original price: $99.55

  • Interest: $500

• Second month:

  • Original price: $100.05

  • Interest: $499.50

• As can be seen:

  • The principal payment in the second month is higher than in the first month.

  • Interest payments have decreased due to the lower principal balance.

4. Important rules in loan depreciation

• When the principal balance decreases gradually each month:

  • The amount of interest payable also decreases accordingly.

  • The principal amount in each payment period will increase.

• This is the core characteristic of calculating loan depreciation on a monthly basis.

5. Practical implications for borrowers

• This will help you understand why:

  • The initial phase involves paying more interest.

  • As time goes on, the loan eats into the principal faster.

• Since:

  • It's easy to check the depreciation schedule provided by the bank.

  • Proactively calculate down payment options to reduce total interest costs.

Part 2: How to calculate loan depreciation over the term

Step 1: Analyze depreciation trends over time and calculation methods for the third month.

1. Trends in principal and interest over time

• Each month, a portion of the principal is repaid.

• The principal balance decreases after each payment period.

• When the principal balance decreases:

  • The interest earned on that balance also decreases.

• The result is:

  • The principal amount in each payment period increases gradually over time.

2. Determine the opening principal balance for the third month.

• The outstanding principal balance at the beginning of March is calculated as follows:

  • Outstanding balance at the end of February – principal payments made in February.

• Let's apply this example:

  • 99,900.45 − 100.05 = 99,800.40 USD

• This is the principal balance used to calculate the interest for the third month.

3. Calculate the interest payable for the third month.

• Recipe:

  • Monthly interest = Principal balance × monthly interest rate

• Apply:

  • 99,800.40 × 0.005 = 499 USD

• Interest rates continued to decrease compared to previous months.

4. Calculate the principal payment for the third month.

• Recipe:

  • Principal = Total monthly payments - interest

• Apply:

  • 599.55 - 499 = 100.55 USD

• The principal amount was higher than in February and January.

5. Conclusion on the depreciation law

• Month by month:

  • Declining interest

  • The principal amount increases gradually.

• This is the core principle of:

  • Loan depreciation schedule

  • Home loans, car loans, long-term installment loans

Step 2: The impact of depreciation when the loan ends.

1. The trend of interest rates decreasing towards the end of the period.

• The outstanding principal balance decreases continuously each month.

• Interest is calculated on the remaining principal balance , therefore:

  • The interest earned decreases towards the end of the term.

• In the final month:

  • The interest was only $2.98 , almost negligible.

2. The principal amount accounts for almost the entire payment.

• The total monthly payment remains the same.

• When interest rates fall sharply:

  • The remaining amount will automatically be transferred to repay the principal.

• At the final payment period:

  • The principal amount is $596.37.

  • Almost the entire amount that month was due.

3. The principal balance is zero at the end of the loan.

• After the last payment:

  • The entire principal amount has been repaid.

  • Remaining balance = 0

• The loan has officially ended, with no further obligations regarding interest or principal.

4. Practical implications that borrowers need to understand.

• Loan depreciation always has the following characteristics:

  • Beginning of term: pay more interest, less principal.

  • At the end of the term: a large amount of principal is paid, very little interest is paid.

• This explains why:

  • Paying the principal upfront at the beginning significantly reduces the total interest payment.

  • The benefits of paying upfront gradually decrease over time.

Step 3: Apply depreciation to make smart financial decisions.

1. Why you need to understand loan depreciation

• Most of the items:

  • Home loan

  • Car loan

  • Long-term installment loans
    They both apply the depreciation method.

• When you understand depreciation, you will know:

  • How much interest am I paying each month?

  • How much money actually reduces the principal debt?

2. Prioritize paying extra to quickly reduce the principal amount.

• When you have the financial means, do the following:

  • Pay extra on top of the principal amount.

• Practical benefits:

  • The principal balance is decreasing at a faster rate.

  • Interest calculated on the outstanding balance decreases as

  • The total interest payable over the loan term is significantly reduced.

• The principle is simple:

  • Reduce the principal amount as early as possible → save more interest

3. Focus on the loan with the highest interest rate.

• If you have multiple loans at the same time:

  • Let's consider the interest rate for each loan.

• Loans with high interest rates:

  • Every additional dollar paid into the principal will result in greater interest savings.

• Common strategy:

  • Prioritize reducing the principal on loans with high interest rates first.

4. Use depreciation calculators to clearly see the benefits.

• You can use:

  • Excel spreadsheet

  • Online loan depreciation calculator

• The comparison is very simple:

  • Calculate depreciation using the initial balance (e.g., 10,000).

  • Recalculate with the reduced balance due to the additional payment (e.g., 9,900).

• Compare:

  • Total interest payable over the loan term

• You will see clearly:

  • Even a small additional payment can create a significant profit margin.

5. Create a depreciation schedule to manage long-term debt.

• A depreciation schedule is a table that shows:

  • Principal is paid in installments.

  • Interest per period

  • Remaining balance over time

• You can:

  • Create your own spreadsheet

  • Alternatively, you can use depreciation calculators available online.

• This is an effective way to:

  • Track your debt repayment progress.

  • Develop a clearer long-term financial plan.

References

1. https://www.myamortizationchart.com/articles/
   how-is-an-amortization-schedule-calculated/
2. https://www.indeed.com/career-advice/career-development/
   amortization-schedule-in-excel
3. https://www.calculatorsoup.com/calculators/financial/
   amortization-equal-principal-payments-calculator.php
4. https://www.calculator.net/amortization-calculator.html
5. https://themortgagereports.com/11183/
   bi-weekly-mortgage-payments-will-you-pay-your-mortgage-faster
6. https://www.forbes.com/advisor/personal-loans/what-is-loan-amortization/
7. https://www.bankrate.com/mortgages/prepaying-your-mortgage/
8. https://www.bankrate.com/mortgages/amortization-calculator/

Translated by: Rene Lee Nguyen .