What formula is used to compute the depreciation rate based on the estimated life of an asset?

The formula to compute the depreciation rate based on the estimated life of an asset is derived from the understanding that the depreciation rate represents how much of the asset's value is to be allocated as an expense each year. Specifically, using the estimated life is fundamental because it indicates the number of years the asset is expected to provide economic benefits to the business.

Using the method 1.00 / estimated life effectively distributes that 100% value of the asset over its useful life. For instance, if an asset has an estimated life of 5 years, the depreciation rate would be 1.00 / 5, which equals 20%. This tells you that 20% of the asset’s value will be expensed each year for five years until fully depreciated.

This formula is particularly useful when using the straight-line method of depreciation, which is one of the most commonly used methods. It simplifies the process and helps ensure that the expense recognition aligns with revenue generation from the asset over its useful life. Therefore, this approach is consistent with basic principles of accounting that seek to match expenses with the revenues they help generate.