Depreciation Calculator

How Depreciation Is Calculated

Depreciation spreads an asset's cost over its useful life instead of expensing the full amount the year it's purchased, matching the expense to the years the asset actually helps generate revenue. The two most common methods split the same total depreciable amount — cost minus salvage value — very differently across the years.

Straight-Line Depreciation

Straight-line depreciation deducts the exact same dollar amount every single year: $$\text{Annual Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}$$

It's the simplest method and the most common for financial reporting, since a flat, predictable deduction is easy to plan around.

Declining Balance Depreciation

Declining balance depreciation instead applies a fixed percentage rate to the asset's remaining book value each year, so the dollar deduction is largest in the early years and shrinks as the book value shrinks: $$\text{Depreciation}_{\text{year}} = \text{Book Value} \times \text{Rate}, \quad \text{Rate} = \frac{\text{Multiplier}}{\text{Useful Life}}$$

The multiplier defaults to 2 (double-declining balance, twice the straight-line rate) but can be set to any value — 150% declining balance, for example, uses a multiplier of 1.5. Book value is never allowed to fall below the salvage value; once it reaches salvage, depreciation stops even if years remain in the useful life.

Worked Examples

1. Straight-line. A 50,000-dollar asset with a 5,000-dollar salvage value and a 10-year useful life: $(50{,}000 - 5{,}000) / 10 = 4{,}500$ dollars a year, every year, for 10 years.
2. Double-declining balance. The same 50,000-dollar asset with a 10-year life gives a straight-line rate of 10% a year, doubled to a 20% declining balance rate. Year 1 depreciation is $50{,}000 \times 0.20 = 10{,}000$ dollars, dropping the book value to 40,000 dollars. Year 2 depreciation is $40{,}000 \times 0.20 = 8{,}000$ dollars, and so on — each year's deduction shrinks as the book value shrinks, until the book value reaches the 5,000-dollar salvage floor.

Choosing a Depreciation Method

Straight-line is the simplest and most predictable, and is what most businesses use for their financial statements. Declining balance front-loads the deduction, which can be advantageous for tax purposes on assets that lose most of their value early (vehicles and technology equipment are common examples) or when a business wants to match higher deductions against higher early-year revenue. Tax rules in most jurisdictions specify which methods are allowed for which asset types, so always confirm the applicable method with a tax professional before filing.

Depreciation Terms You Should Know

Book Value — an asset's cost minus all depreciation taken so far; it starts at the full cost and ends at the salvage value once fully depreciated.

Salvage Value — also called residual value, the asset's expected worth at the end of its useful life; depreciation only applies to the amount above this floor.

Useful Life — the number of years an asset is expected to remain productive for its intended purpose.

Double-Declining Balance — the most common declining balance variant, using a rate multiplier of 2 (twice the straight-line rate).

Depreciable Base — the total amount that will be depreciated over an asset's life, equal to cost minus salvage value.

MACRS (Modified Accelerated Cost Recovery System) — the depreciation system the IRS requires for most US business property on a tax return, using its own fixed recovery-period percentage tables rather than the straight-line or declining balance methods this calculator uses for book purposes. See IRS Publication 946 for the official tables and rules.

This calculator provides estimates for educational and planning purposes only. Actual depreciation rules vary by jurisdiction and asset type. Consult a qualified tax professional or accountant for guidance specific to your situation.