 Depreciation is the process of allocating the cost of long-term plan assets to expense over its useful life. We allocate asset costs to expense with the following adjusting journal entry. We debit depreciation expense and we credit accumulated depreciation for the amount of the expense. In this video, let's learn how to calculate depreciation expense with the Units of Production method. In order to calculate depreciation expense, we need three values. One is a known amount, asset costs, and the other two are estimated, the residual value and the useful life. The formula for units of production is that asset cost minus residual value divided by the useful life in terms of units. This gives us a depreciation rate per unit. Then we take the depreciation rate per unit and multiply that by the actual units of a period. That result will equal the annual depreciation expense, which we would then record in our adjusting journal entry. Okay, so let's look at an example. On January 1, the Pixies purchase a touring bus for an upcoming concert tour. The bus costs $250,000, has an estimated useful life of 250,000 miles. At the end of its useful life, it is estimated that the bus will have a value of $50,000. Using the Units of Production method, let's calculate the amount of depreciation expense and asset book value at your end. The formula is cost minus residual value divided by useful life in terms of units. So 250,000 minus 50,000, that equals 200, then divide that by 250,000 miles, and we get a depreciation rate of 80 cents per mile. What this tells us is for every mile the bus is driven, 80 cents of depreciation expense will be recorded. If the actual miles in year one would have been 60,000 miles, then the amount of depreciation expense would have been $48,000. We get this by multiplying 60,000 actual miles times the depreciation rate of 80 cents per mile. We can record the adjusting journal entry by debiting depreciation expense and crediting accumulated depreciation for $48,000. The book value is the cost of the asset minus its accumulated depreciation. So cost of $250,000 minus accumulated depreciation of $48,000 gives us a net book value of $202,000. Okay, the final concept related to depreciation is partial year depreciation. When assets are placed in service on dates other than the first of the year, we need to adjust how much depreciation we record for the first year. However, partial year depreciation does not apply to the units of production method because depreciation expense is based on actual units, not time. So it doesn't matter when the pixies put the bus into service. If they drove 60,000 miles in the year, then depreciation expense is $48,000. It doesn't matter if they started driving in January, July, or December.