Depreciation Calculator
Depreciation Methods
Related Calculators
Understanding Asset Depreciation
What is Depreciation?
Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life. It represents how much of an asset's value has been used up over time. Rather than expensing the entire cost when purchased, businesses spread the expense over the years the asset provides value.
Key Terms
Depreciation Methods Explained
1. Straight-Line Depreciation
The simplest and most commonly used method. It spreads the cost evenly over the asset's useful life.
2. Declining Balance Method
An accelerated method that applies a fixed percentage to the declining book value each year. Results in higher depreciation early in the asset's life.
3. Double Declining Balance (DDB)
A more aggressive accelerated method using twice the straight-line rate. Popular for assets that lose value quickly in early years.
4. Sum-of-Years Digits (SYD)
Another accelerated method that applies a decreasing fraction to the depreciable amount each year based on remaining useful life.
Example Comparison
For a $50,000 asset with $5,000 salvage value and 5-year useful life:
| Year | Straight-Line | Double Declining | Sum-of-Years |
|---|---|---|---|
| 1 | $9,000 | $20,000 | $15,000 |
| 2 | $9,000 | $12,000 | $12,000 |
| 3 | $9,000 | $7,200 | $9,000 |
| 4 | $9,000 | $4,320 | $6,000 |
| 5 | $9,000 | $1,480 | $3,000 |
Choosing the Right Method
Use Straight-Line When:
- Asset provides consistent value over time
- Simplicity is preferred
- Even expense recognition is desired
- Required for financial reporting
Use Accelerated When:
- Asset loses value quickly early on
- Higher early deductions are beneficial
- Technology or vehicles
- Tax optimization is priority
Important Note
This calculator provides estimates for educational purposes. Tax depreciation rules (like MACRS in the US) may differ from book depreciation. Consult a tax professional for specific tax depreciation calculations.
Frequently Asked Questions
What is the difference between straight-line and accelerated depreciation?
Straight-line depreciation spreads the cost evenly over the asset's useful life (same expense each year). Accelerated methods like double-declining balance and sum-of-years' digits front-load depreciation, taking larger deductions in early years. Accelerated methods benefit businesses wanting larger tax deductions early, while straight-line provides consistent expenses for financial reporting.
How do I calculate straight-line depreciation?
Use the formula: Annual Depreciation = (Asset Cost - Salvage Value) / Useful Life. For example, a $50,000 machine with $5,000 salvage value and 5-year life: ($50,000 - $5,000) / 5 = $9,000 per year. This $9,000 is recorded as depreciation expense each year for 5 years.
What is MACRS depreciation?
MACRS (Modified Accelerated Cost Recovery System) is the tax depreciation system used in the United States. It specifies recovery periods (3, 5, 7, 10, 15, 20, 27.5, or 39 years) and uses accelerated methods for most property. MACRS often differs from book depreciation methods, creating differences between tax and financial statements.
What is salvage value and how do I estimate it?
Salvage value (or residual value) is the estimated amount an asset will be worth at the end of its useful life. It's based on what you could sell the used asset for or its scrap value. Many businesses use 10-20% of original cost as a rough estimate, though some assets (like computers) may have near-zero salvage value due to obsolescence.