Depreciation Calculator
Calculate asset depreciation using Straight-Line, Declining Balance, Double Declining Balance, or Sum-of-Years' Digits methods. View the complete yearly depreciation schedule. See also Break Even Calculator and ROI Calculator.
How to Calculate Depreciation
Depreciation allocates the cost of a tangible asset over its useful life. The depreciable amount is the asset cost minus its salvage value (estimated value at end of life). Different methods spread this cost differently: straight-line distributes it evenly, while accelerated methods (declining balance, double declining, sum-of-years' digits) front-load more depreciation in earlier years. The choice of method affects financial statements and tax deductions.
Depreciation Formulas
Straight-Line:
Annual Dep = (Cost − Salvage) / Useful Life
Declining Balance:
Annual Dep = Book Value × (1 / Useful Life)
Double Declining Balance:
Annual Dep = Book Value × (2 / Useful Life)
Sum-of-Years' Digits:
Annual Dep = (Cost − Salvage) × (Remaining Life / Sum of Years)
Sum of Years = n(n+1)/2
Example Calculation
Asset Cost: $50,000 | Salvage: $5,000 | Life: 5 years
Straight-Line:
Annual Dep = ($50,000 − $5,000) / 5 = $9,000/year
Double Declining Balance (Year 1):
Dep = $50,000 × (2/5) = $20,000
Sum-of-Years (Year 1):
Sum = 5(6)/2 = 15
Dep = $45,000 × (5/15) = $15,000
Method Comparison Table ($50,000 asset, $5,000 salvage, 5 years)
| Year | Straight-Line | Declining Bal. | Double Decl. | Sum-of-Years |
|---|---|---|---|---|
| 1 | $9,000 | $10,000 | $20,000 | $15,000 |
| 2 | $9,000 | $8,000 | $12,000 | $12,000 |
| 3 | $9,000 | $6,400 | $7,200 | $9,000 |
| 4 | $9,000 | $5,120 | $800 | $6,000 |
| 5 | $9,000 | $4,096 | $0 | $3,000 |
Frequently Asked Questions
Which depreciation method should I use?
Straight-line is simplest and most common for financial reporting. Accelerated methods (double declining, sum-of-years) are better for tax purposes as they provide larger deductions in early years. The IRS allows MACRS (Modified Accelerated Cost Recovery System) for tax depreciation in the US.
What is salvage value?
Salvage value (or residual value) is the estimated amount the asset will be worth at the end of its useful life. It could be the scrap value, trade-in value, or resale value. Some assets have zero salvage value if they're expected to be worthless at end of life.
Can land be depreciated?
No. Land is not depreciated because it has an unlimited useful life and generally does not lose value. However, land improvements (fencing, paving, landscaping) can be depreciated. Buildings on land are depreciated separately from the land itself.
What is the difference between depreciation and amortization?
Depreciation applies to tangible assets (equipment, vehicles, buildings). Amortization applies to intangible assets (patents, copyrights, goodwill). Both spread the cost over the asset's useful life, but they apply to different types of assets.
Solved Examples
Example 1: Straight-line depreciation for office equipment
Solution:
Asset cost = $50,000, Salvage value = $5,000, Useful life = 10 years
Annual Depreciation = (Cost - Salvage) / Useful Life
Annual Depreciation = ($50,000 - $5,000) / 10 = $4,500/year
Book value after 4 years = $50,000 - (4 × $4,500) = $32,000
Answer: $4,500 per year in depreciation. After 4 years, the book value is $32,000.
Example 2: Double declining balance for a delivery truck
Solution:
Cost = $80,000, Salvage = $10,000, Life = 5 years
DDB rate = 2 / 5 = 40%
Year 1: $80,000 × 40% = $32,000 (Book value: $48,000)
Year 2: $48,000 × 40% = $19,200 (Book value: $28,800)
Year 3: $28,800 × 40% = $11,520 (Book value: $17,280)
Year 4: $17,280 × 40% = $6,912 (Book value: $10,368)
Year 5: $10,368 - $10,000 = $368 (switch to straight-line to reach salvage)
Answer: DDB front-loads depreciation — $32,000 in Year 1 vs $14,000/year with straight-line.
Example 3: Sum-of-years-digits for manufacturing equipment
Solution:
Cost = $120,000, Salvage = $20,000, Life = 5 years
Sum of years = 5+4+3+2+1 = 15
Depreciable base = $120,000 - $20,000 = $100,000
Year 1: $100,000 × (5/15) = $33,333
Year 2: $100,000 × (4/15) = $26,667
Year 3: $100,000 × (3/15) = $20,000
Answer: Year 1 depreciation = $33,333, declining each year as the asset ages.
Practice Questions
Try these on your own:
- A machine costs $200,000 with $20,000 salvage and 8-year life. What is the straight-line annual depreciation? (Answer: $22,500)
- Using DDB: $60,000 asset, 4-year life. What is Year 1 and Year 2 depreciation? (Answer: Year 1 = $30,000, Year 2 = $15,000)
- A computer costs $3,000 with no salvage value and 3-year life. What is the sum-of-years-digits depreciation for Year 1? (Answer: $1,500)
- After 6 years of straight-line depreciation, a $100,000 asset (10-year life, $0 salvage) has what book value? (Answer: $40,000)
- Which method gives the highest tax deduction in Year 1: straight-line, DDB, or SYD? (Answer: DDB typically gives the highest first-year deduction)
Common Mistakes to Avoid
A frequent error is depreciating below salvage value — regardless of the method used, the book value should never go below the estimated salvage value. Another mistake is selecting the wrong useful life; the IRS provides specific guidelines (MACRS) for different asset classes, and using arbitrary lifespans can trigger audit issues. People often confuse depreciation (a non-cash accounting expense) with actual asset value decline — market value may differ significantly from book value. With declining balance methods, forgetting to switch to straight-line when it becomes more advantageous results in never fully depreciating the asset. Finally, many forget that land is NEVER depreciated — only buildings, equipment, and other tangible assets with finite useful lives can be depreciated.
Key Takeaways
- Straight-line is simplest: (Cost - Salvage) / Useful Life = equal annual deductions.
- Accelerated methods (DDB, SYD) give higher deductions early, beneficial for tax deferral.
- Depreciation is a non-cash expense that reduces taxable income but doesn't affect cash flow directly.
- MACRS (Modified Accelerated Cost Recovery System) is required for US tax purposes.
- Never depreciate below salvage value, and remember that land cannot be depreciated.
- The choice of method affects financial statements: accelerated methods show lower early profits, straight-line shows consistent profits.