Depreciation

How the Depreciation Schedule Is Built

Depreciation spreads the cost of a business asset over its useful life, reflecting how the asset loses value over time. Enter what the asset cost, what it’ll be worth at the end of its useful life (salvage value), and how many years it’ll be in service, and this calculator builds a full year-by-year depreciation schedule under either of the two most common methods.

• Straight-line spreads the depreciable amount evenly across every year — the simplest method, and the default for financial reporting.
• Double-declining balance is an “accelerated” method: a larger share of the expense is booked in the early years and less in later years, which more closely matches how some assets (like vehicles or computers) actually lose value fastest when new.

The Formula

Straight-line:

$$\text{Annual Depreciation} = \frac{\vA{\text{Cost}} - \vB{\text{Salvage Value}}}{\vC{\text{Useful Life}}}$$

The same amount every year.

Declining balance:

$$\text{Depreciation Expense} = \text{Book Value} \times \vD{d}, \qquad \vD{d} = \frac{\text{Factor}}{\vC{\text{Useful Life}}}$$

Applied to whatever book value remains each year (not the original cost) — capped so book value never dips below $\vB{\text{Salvage Value}}$. A factor of 2 (double-declining) is the most common choice.

Worked Example

A $\vA{\$50,000}$ asset with a $\vB{\$5,000}$ salvage value and a $\vC{5\text{-year}}$ useful life, reporting on year 3:

Straight-line:

1. Annual depreciation: $(\vA{50,000} - \vB{5,000}) \div \vC{5} = 9,000$ per year, every year.
2. Accumulated depreciation after 3 years: $9,000 \times 3 = 27,000$.
3. Book value after 3 years: $50,000 - 27,000 = 23,000$.

Double-declining balance:

1. Rate: $\vD{d} = 2 \div \vC{5} = 0.4$.
2. Year 1 books $\vA{50,000} \times \vD{0.4} = 20,000$, dropping book value to $30,000.
3. Year 2 books $30,000 \times \vD{0.4} = 12,000$, dropping book value to $18,000.
4. Year 3 books $18,000 \times \vD{0.4} = 7,200$, leaving a book value of $10,800$ — noticeably more depreciation booked earlier than straight-line’s flat $9,000/year.

Key Factors to Consider

• Book value and tax basis are two different concepts, and don’t need to match. A company can use straight-line depreciation for its own financial reporting while using an entirely different schedule (like MACRS in the U.S.) for tax purposes — the two calculations are independent and often intentionally different.
• Total depreciation over an asset’s full life is identical between methods, only the timing differs. Straight-line and declining balance both depreciate the exact same total amount (cost minus salvage value) by the end of the useful life — declining balance just books more of it earlier, deferring less to later years.
• Estimating useful life and salvage value both require judgment, not a fixed formula. Both figures are estimates based on how the asset is expected to be used and how the market for similar used assets typically behaves — a poor estimate on either input throws off the whole schedule, regardless of which depreciation method is chosen.
• Some assets don’t depreciate in a way either of these methods captures well. Real estate land value, for instance, is typically not depreciated at all (only the building on it is), and certain assets follow usage-based depreciation (units of production) rather than a purely time-based schedule.

Common Mistakes

• Confusing book value with market value. A depreciation schedule tracks an accounting concept used for financial reporting or tax purposes — it doesn’t necessarily reflect what the asset would actually sell for at any given point, which can differ substantially, especially for real estate or specialized equipment.
• Assuming the depreciation method changes the total expense. It doesn’t — straight-line and declining balance both depreciate the exact same total amount (cost minus salvage value) over the asset’s life; only which years get more or less of that expense changes.
• Treating tax depreciation and book depreciation as the same schedule. A business’s financial statements can use straight-line while its tax return uses a completely different schedule (like MACRS in the U.S.) — mixing the two up leads to real reporting and filing errors.

Useful to Know

The choice between straight-line and declining balance isn’t really about which one is “more accurate” — it’s about which pattern of expense timing better matches how a specific asset actually loses usefulness. A building that provides steady value for decades is a natural fit for straight-line’s even spread; a vehicle or piece of technology that loses most of its value in the first few years of use is a better fit for declining balance’s front-loaded expense.