Depreciation basis, salvage value and useful life
The examples assume cost $50,000, residual value $5,000 and five-year useful life. Straight-line spreads the $45,000 depreciable amount evenly. Declining-balance applies a rate to opening carrying value and must respect the residual floor; it does not begin by subtracting residual from every opening balance.
Straight-line is the even slice
Straight-line takes the depreciable amount and divides it by the life, so every year gets the same charge. A $50,000 asset with $5,000 of salvage over five years loses $9,000 a year, or $750 a month. It is the simplest method, it is easy to forecast and it suits assets that lose value at a steady pace.
Double-declining balance front-loads the charge
Double-declining balance applies twice the straight-line rate to the remaining book value each year. On the same asset the rate is 40 percent, so year one is $20,000 and year two is $12,000. The charge falls each year, and the method stops when book value reaches salvage.
It suits assets that lose most of their value early, such as vehicles and technology.
Sum-of-years digits changes annual allocation
For the assumed $50,000 cost, $5,000 residual and five-year life, the depreciable amount is $45,000. The digits sum to 15. First-year charge is 5/15 × $45,000 = $15,000; fifth-year charge is 1/15 × $45,000 = $3,000.
These are full-year book-method examples. Tax recovery rules and partial-year conventions require the applicable separate schedule.
Units of production follows measured use
Assume the same $45,000 depreciable amount, estimated lifetime output 100,000 units and first-year production 20,000 units. Charge is $45,000 × 20000/100000 = $9,000. The estimate can change when expected output changes.
A use-based allocation and a time-based charge can coincide in one year without being the same method; neither establishes current market value.
Book value and accumulated depreciation
Book value is the cost less the depreciation charged so far. It falls each year until it reaches salvage value. The running total of charges is accumulated depreciation.
Under any method, the sum of all the yearly charges equals the depreciable amount, which is a useful check that a schedule is complete.
Book records and tax records differ
The method used for financial reporting is often not the one used for tax. Tax rules prescribe their own schedules and lives for many assets, and they can differ from what the books show. The IRS publishes the rules in Publication 946, and a tax preparer decides which apply.
The calculators here are best used for book schedules and for comparing methods.
Choosing a method
Pick the method that matches how the asset loses value and how the business wants its costs to appear over time. Steady wear favors straight-line, early loss favors an accelerated method and usage-driven wear favors units of production. Whatever you choose, apply it consistently so the years stay comparable.
What depreciation does not tell you
Depreciation is an accounting allocation, not a market price. An asset can be worth more or less than its book value at any moment. The schedule says how the cost is spread, not what you would get if you sold it, so keep the two questions apart when you plan a sale or a replacement.
Assumed inputs and calculated outputs
Straight-Line Depreciation Calculator: input sensitivity
| Purchase cost | Yearly depreciation | Monthly depreciation | Total depreciable amount |
|---|---|---|---|
| $40,000 | $7,000 | $583 | $35,000 |
| $45,000 | $8,000 | $667 | $40,000 |
| $50,000 | $9,000 | $750 | $45,000 |
| $55,000 | $10,000 | $833 | $50,000 |
| $60,000 | $11,000 | $917 | $55,000 |
Open the Straight-Line Depreciation Calculator to use your own numbers →
What goes wrong
Depreciation methods compared: common errors
| The mistake | Why it misleads | Do this instead |
|---|---|---|
| Depreciating the full purchase cost | Salvage value is what the asset should still be worth, and it is not depreciated. | Subtract salvage value first and spread only the difference. |
| Applying the declining rate to the original cost each year | The rate acts on the shrinking book value, and using the cost repeats year one's charge. | Apply the rate to the book value at the start of each year. |
| Assuming book value equals market value | Depreciation is a schedule, and real prices move for other reasons. | Treat book value as an accounting figure and check the market separately. |
| Mixing methods across years | Changing methods midway makes the years incomparable and can break the total. | Choose one method for an asset and apply it for its whole life. |
Depreciation methods compared: worked calculation
Using the Straight-Line Depreciation Calculator worked example, moving Purchase cost from $40,000 to $60,000 changes the Yearly depreciation from $7,000 to $11,000.
| Input | Value | Definition |
|---|---|---|
| Purchase cost | $50,000 | Entered example assumption. |
| Salvage value | $5,000 | What the asset is expected to be worth at the end of its life. |
| Useful life | 5.0 years | How many years the asset is expected to be in service. |
| Yearly depreciation | $9,000 |
|---|---|
| Monthly depreciation | $750 |
| Total depreciable amount | $45,000 |
| Purchase cost | Yearly depreciation | Monthly depreciation | Total depreciable amount |
|---|---|---|---|
| $40,000 | $7,000 | $583 | $35,000 |
| $45,000 | $8,000 | $667 | $40,000 |
| $50,000 | $9,000 | $750 | $45,000 |
| $55,000 | $10,000 | $833 | $50,000 |
| $60,000 | $11,000 | $917 | $55,000 |
Which input moves the yearly depreciation most in the straight-line depreciation calculator?
Ranked by how far each moves the yearly depreciation across the range tested: useful life ($3,750, 42%), purchase cost ($2,000, 22%) and salvage value ($200, 2.2%).
If I double useful life in the straight-line depreciation calculator, does the yearly depreciation double?
Doubling it from 5.0 years to 10.0 years takes the yearly depreciation from $9,000 to $4,500, which is 0.50 times the worked-example figure. So it falls instead of rising. Halving it to 2.5 years gives $18,000.
Depreciation methods compared: points to carry forward
- Every method spreads the same depreciable amount, cost less salvage, and only the timing differs.
- Straight-line gives an even charge, and the accelerated methods charge more in early years.
- Double-declining balance never takes book value below salvage value.
- Units-of-production matches the charge to how much the asset is used.
- Book and tax depreciation can differ, so confirm the tax method with a professional.
What is depreciation?
It is the spreading of an asset's cost over its useful life, so the expense matches the years the asset is used.
What is salvage value?
The amount an asset is expected to be worth at the end of its useful life. It is subtracted from the cost before depreciation is spread.
Which depreciation method is best?
It depends on how the asset loses value. Steady wear suits straight-line, early loss suits an accelerated method, and usage-driven wear suits units of production.
How do I calculate straight-line depreciation?
Subtract the salvage value from the cost and divide by the useful life in years. The straight-line depreciation calculator shows the yearly and monthly figures.
What is double-declining balance?
An accelerated method that applies twice the straight-line rate to the remaining book value each year, stopping at salvage value.
Is book depreciation the same as tax depreciation?
Not always. Tax rules set their own methods and lives, described in IRS Publication 946, so the two schedules can differ.
Does depreciation reduce cash?
No. It is a non-cash expense that lowers reported profit. The cash left when the asset was bought and the cash flowing in later are separate events.
Can an asset be depreciated below its salvage value?
No. Under each method the book value stops at salvage value, and the accelerated methods cap the last charges so they do not cross it.
What happens when the useful life is estimated wrongly?
The schedule can be revised going forward, with the remaining book value spread over the new remaining life. An accounting-policy change and a revised useful-life estimate have different reporting implications.
Why use an accelerated method at all?
It matches the expense to assets that lose value fastest in their early years, and for tax purposes it can bring deductions forward. Whether it applies depends on the rules for the asset.