Depreciation Calculator

What Is Depreciation?

Depreciation is the decline in an asset's value as it wears out, ages or becomes obsolete. A machine produces less each year, a vehicle loses value the moment it leaves the lot, and a computer slows down as software moves on. In accounting, depreciation has a more specific job: it spreads the cost of a long-lived asset across the years it helps earn revenue, rather than recording the whole purchase as an expense in year one. That keeps the income statement from showing a misleading spike followed by years that look unrealistically profitable.

Depreciation Methods

• Straight-line: the same amount every year. Annual depreciation = (Cost − Salvage value) ÷ Useful life. A $12,000 machine with a $2,000 salvage value and a 5-year life loses $2,000 a year.
• Declining balance: a fixed percentage of the remaining book value each year, so charges are largest at the start. The double-declining balance method uses a rate of twice the straight-line rate (a depreciation factor of 2).
• Sum-of-the-years'-digits: also front-loaded, using a fraction whose numerator is the remaining life and denominator is the sum of the years' digits (for 5 years, 5+4+3+2+1 = 15).

Worked Example

A $50,000 asset with a $5,000 salvage value, depreciated over 10 years, loses $4,500 in value each year ($375/month) — for $45,000 in total depreciation over its useful life.

Key Terms

• Cost basis: what you paid for the asset, including setup costs.
• Salvage value: what you expect it to be worth at the end of its life.
• Useful life: how many years it is expected to be productive.
• Book value: cost minus the depreciation recorded so far.

Choosing a Method

Straight-line is the simplest and the default for many businesses. Accelerated methods suit assets that lose most of their usefulness early — vehicles, computers — and can offer bigger early tax deductions where the law permits. Tax rules often prescribe their own schedules, so follow your local tax guidance and an accountant's advice for filings.

Depreciation vs. Amortization

Depreciation applies to physical assets, while amortization spreads the cost of intangible ones like patents; the loan-repayment meaning of amortization is covered by the Amortization Calculator. To estimate the return on a purchase, try the Payback Period Calculator.