Depreciation

A machine, a van or a laptop loses value as it is used. Depreciation spreads its cost over the years it is used, so each year’s profit carries its share. Enter the purchase price, the expected salvage value and the useful life for the yearly depreciation and the book value year by year, and compare straight-line, declining balance, sum of the years’ digits and units of production side by side.

AccountingAssetsBook value

Inputs

Input examples

The cost is the purchase price plus what it takes to get the asset working (delivery, installation). The salvage value (residual value) is what you expect to sell it for at the end; use 0 if nothing. Depreciation is calculated in whole years, as if the asset was bought at the start of year 1. Declining balance takes a fixed share of the remaining book value each year: 200% (double) or 150% of the straight-line rate, switching to straight-line when that gives more, or a fixed percentage you choose (leave it empty for the rate that ends exactly at the salvage value). Units of production follows how much the asset is actually used. Tax rules differ by country; for education only — not tax advice.

Currency

Cost C — €

Salvage value S — € at the end

Useful life n — years

Method

Why Depreciate, and Which Method?

When a company buys a van for 30 000, the money is gone at once, but the van keeps working for years. Charging the whole price to the first year would make that year look terrible and the next ones too good. Depreciation spreads the cost: each year carries an expense, and the van appears on the balance sheet at its book value, the cost minus all depreciation so far.

Straight-line charges the same amount every year: simple, and right for assets that wear evenly, such as buildings or furniture. Declining balance and sum of the years’ digits charge more in the first years, which fits cars, computers and machines that lose value fastest when new. Units of production ties the expense to use, such as machine hours or kilometres.

Depreciation is not a payment: no money leaves the company when it is booked. It does lower the taxable profit, though, and so the tax. Faster methods bring that saving forward, which is worth money because of the time value of money; see the tax option of the Investment Appraisal calculator.

totalalways cost − salvage

200% DBrate 2/n of the book value

book valuenever below the salvage value

not cashonly a tax effect on cash

Book Value Over the Years

book value

Result

Enter the asset above

Depreciation Schedule

Year	Book value at the start	Depreciation	Accumulated	Book value at the end

All Methods Compared

same cost, salvage value and life

Method	Year 1	Year 2	Last year	Book value halfway

Worked Techniques

Straight-Line

Subtract the salvage value, divide by the years. The book value falls by the same amount every year, in a straight line.

Example: after 2 years the van is on the books for 30 000 − 2 × 4 800 = 20 400.

Double Declining Balance

Take twice the straight-line rate of what is left each year (the salvage value is ignored in the rate). Stop at the salvage value, and switch to straight-line over the remaining years once that charges more.

Example: the van reaches its 6 000 salvage value in year 4 (480 that year).

Sum of the Years’ Digits

Add up the year numbers; the first year gets the largest fraction, the last year the smallest.

Example: year 1: 5/15 × 24 000 = 8 000; year 5: 1/15 × 24 000 = 1 600.

Sources & Verification

References

IAS 16 Property, Plant and Equipment, IFRS Foundation — §§60–62: straight-line, diminishing balance and units of production; the depreciable amount is cost minus residual value.
J. J. Weygandt, P. D. Kimmel and D. E. Kieso, Financial Accounting with International Financial Reporting Standards, Wiley — the chapter on plant assets: worked schedules for straight-line, declining balance and units of activity.
C. S. Park, Contemporary Engineering Economics, Pearson — the chapter on depreciation: declining balance with the switch to straight-line, sum of the years’ digits.