There are three main ways to calculate the value of your old couch after taking depreciation into account, Constant Depreciation, Sum-of-years Depreciation, and Leather Depreciation. The most commonly used way is to subtract 20% of the couch’s original cost for every year that you’ve used the couch.
As long as you consider the various factors we’re about to discuss, figuring out your couch’s depreciation is straightforward.
- Different Ways To Calculate Couch Depreciation
- Couch Depreciation Formulas
Different Ways To Calculate Couch Depreciation
There are three ways to calculate your couch’s depreciation.
But which one should you use? The answer depends on factors like the brand’s lifespan and quality.
So before we get into the mathematical part, let’s first figure out which method suits your couch the most.
1. Constant Depreciation Method
The constant depreciation method, better known as the “straight line” method, is used to calculate the depreciation of most couches as it’s the easiest.
However, it’s also the least profitable one.
An average couch will cost between $1000 and $2000.
These couches come from brands that use long-lasting materials to manufacture their products.
Using the constant depreciation method will most likely yield you the lowest value since it considers that the couch’s depreciation is quicker with the average couch than with the one that’s durable and taken well care of.
That said, this method is the best one to pick if you have a low-quality couch that’s not in the best condition.
2. Sum-Of-Years Depreciation Method
Sum-of-years depreciation is pretty direct as its name.
This method involves adding up the years of the couch’s lifespan, and it has a slower depreciation rate than the constant depreciation method.
This means that the value you get from this calculation would most likely be higher than what you would get from the constant depreciation method.
If you’ve taken good care of your couch by cleaning it routinely and keeping it away from stains and wear, then using this method is the safest option.
It’s most useful with couches that have a specific lifespan.
An average couch’s lifespan is about five years.
However, certain brands make couches that last a specific number of years before being deemed unusable, more or less than the average five years.
Note that the 5-year average is also used for the constant depreciation method.
Depending on the lifespan of your couch, the sum-of-years depreciation method would be best applicable.
3. Leather Depreciation Method
Determining when to use this method is pretty straightforward.
If the couch you’re looking to sell is made out of genuine leather, then it’s best to use this method.
However, keep in mind that this method is only used on couches made from pure leather.
If the couch is made from a polyblend that may include leather, then the most applicable method would be one of the two methods mentioned above.
Why Do Leather Couches Have A Specific Method?
Leather is a unique type of material that depreciates at a rate that’s different from an average couch’s rate.
This method of calculation is applicable to most leather-made furniture, not just couches.
Couch Depreciation Formulas
Now that you know which method is best for the couch you’re looking to sell, let’s get to the mathematics of it all.
Each method involves its own form of calculation and has its very own calculator for convenience.
Most methods include certain terms you’ll need to get acquainted with to understand them fully.
- Salvage Value: The base value of the couch at the end of its lifespan. This equates to 20% of its asset cost.
- Asset Cost: The retail cost of the couch when you first bought it.
- Useful Life: The couch’s lifespan.
1. Constant Depreciation Method Calculation Formula
When it comes to the constant depreciation method, we assume that the couch’s lifespan is five years.
The constant depreciation method includes the word constant because the value of the couch decreases at a constant rate.
This is what makes this method the easiest for calculation.
The formula is very simple:
(Asset Cost – Salvage Value)/Useful Life
Useful life is considered as 5 years
Now let’s apply it to an example!
If you have a couch that you initially bought for $1200 about 3 years ago and you want to sell it, you’ll first find the salvage value.
You find the salvage value by calculating 20% of the asset cost.
This is $1200 multiplied by 0.2, which equates to $240. So now we have all the needed values.
- Salvage Value: $240
- Asset Cost: $1200
- Useful Life: 5 years
So the final calculation will be (1200 – 240)/5, which is equal to $192.
Therefore, the depreciation rate of your couch is $192 every year.
So after 3 years of owning it, the value will go from $1200 to $624.
2. Sum-Of-Years Depreciation Method Calculation Formula
This method is also accepted as an accounting principle by the Finance Accounting Foundation (FAF).
The calculations behind it are a bit more complicated than the constant depreciation method, but overall, it’s simple once you get the hang of it.
Before we get to the formula, you need to find your couch’s depreciation rate using the constant depreciation method and add up the sum of the couch’s useful life.
For example, if a couch’s lifespan is 5 years, the value is 1+2+3+4+5=15.
Every year is linked to a value. The first year is linked to 5, the second to 4, the third to 3, and so on.
With every year, you’ll use a unique fraction.
This fraction will be the number linked to that year over the sum of the total number of years.
Now that we’ve got that out of the way, here is the formula:
Constant Depreciation Value x Fraction of the Useful Life
Still don’t fully understand it? Let’s use the same example from earlier.
If it has been 3 years since you bought the couch, the number 3 is linked to 3, so the fraction used will be 3/15.
As we’ve seen earlier, the couch’s depreciation value is $192 a year, so the calculation would be 192 x 3/15, which is equal to $38.4.
This means that your couch decreases in value every year by $38.4. So, its new value, after 3 years, is $1084.8.
3. Leather Depreciation Method Calculation Formula
Like we said before, leather couches depreciate at a specific rate: 5% a year.
So in order to get the depreciation value of your couch, all you need are two values: the asset cost and how long you’ve owned the couch.
The formula is pretty direct:
Asset Cost x Couch Age x Depreciation Rate (0.05)
We’re sure you know the drill by this point. Let’s bring in our example and assume the couch is made out of leather.
The calculation will be $1200 x 3 x 0.05, which is equal to $180.
That means your couch’s value has depreciated by $180.
Therefore, if you were to sell it, its new value would be $1,020.