How is the pro rata method of depreciation calculated?

The pro rata method of depreciation is calculated by taking the annual depreciation expense and dividing it by the number of months in use. This method is particularly useful for assets that are not in service for a full year, allowing for a more accurate allocation of depreciation expense based on the actual time the asset has been operational.

In this method, if an asset is purchased partway through the year, the annual depreciation can be prorated to reflect only the months the asset has been in use. For example, if an asset is placed in service for six months in its first year, you would take the annual depreciation amount and divide it by twelve to find the monthly depreciation expense, then multiply that by six.

This approach ensures that the financial statements reflect the usage of the asset appropriately, aligning expenses with revenues and providing a more accurate picture of a company’s financial position.