Depreciation Formulas
Straight-line and declining balance depreciation formulas for accounting and tax purposes.
Calculate asset value over time with examples.
Straight-Line Depreciation
Straight-line depreciation spreads the cost of an asset evenly over its useful life. Each year, the same amount is deducted, making it the simplest and most commonly used method.
This method works well for assets that lose value at a roughly constant rate, like buildings, furniture, and general equipment.
Declining Balance Depreciation
The declining balance method applies a fixed percentage to the remaining book value each year. This results in larger depreciation charges in early years and smaller ones later — called accelerated depreciation.
Double declining balance (DDB) uses a rate of 2/n, where n is the useful life in years. This method better reflects how many assets (like vehicles and computers) lose value faster when new.
Variables
| Symbol | Meaning |
|---|---|
| Cost | Original purchase price of the asset |
| Salvage Value | Estimated value at the end of useful life |
| Useful Life | Expected number of years the asset will be used |
| Book Value | Current value on the books (cost minus accumulated depreciation) |
| Depreciation Rate | For DDB: 2 / useful life |
Example 1: Straight-Line
A company buys equipment for $50,000 with a salvage value of $5,000 and a useful life of 10 years. What is the annual depreciation?
Annual Depreciation = (Cost − Salvage) / Life = (50,000 − 5,000) / 10
Annual Depreciation = 45,000 / 10
Annual Depreciation = $4,500 per year. After 4 years, the book value is 50,000 − (4 × 4,500) = $32,000.
Example 2: Double Declining Balance
A delivery van costs $40,000 with a useful life of 5 years. Using double declining balance, what is the depreciation for the first 3 years?
DDB rate = 2/5 = 40% per year
Year 1: Depreciation = $40,000 × 0.40 = $16,000. Book value = $24,000
Year 2: Depreciation = $24,000 × 0.40 = $9,600. Book value = $14,400
Year 3: Depreciation = $14,400 × 0.40 = $5,760. Book value = $8,640
After 3 years: total depreciation = $31,360, book value = $8,640. Notice how most of the depreciation happens in the first few years.
Comparison
- Straight-line: Simple, even, easy to calculate — best for assets with steady use
- Declining balance: Front-loads depreciation — better for assets that lose value quickly early on
- Tax advantage: Accelerated methods reduce taxable income more in early years, improving cash flow
When to Use These
Use depreciation formulas for accounting, tax planning, and asset management.
- Preparing financial statements and balance sheets
- Calculating tax deductions for business equipment
- Planning capital expenditure budgets
- Estimating the remaining value of equipment for sale or insurance
- Comparing the total cost of ownership for different asset options