Business studies
Depreciation of a fixed asset
Enter cost, salvage value and useful life: you get the annual charge and the full schedule year by year, with book value and accumulated depreciation.
What the choice of method decides
Depreciation spreads the cost of a fixed asset over the periods in which it is used, because those are the periods in which it earns revenue. The depreciable base is not the whole cost but the cost less the salvage value — what the asset is expected to fetch at the end of its life. That part is not consumed, so it is not charged.
The three methods spread the same base differently over time, but the total charged at the end is identical. Straight line divides it equally and is the civil-accounting reference. Declining balance loads the cost onto the early years, which suits assets that lose value quickly — vehicles, electronics — and offsets maintenance costs that rise in later years.
Sum-of-years digits is the middle course: the charges fall linearly rather than geometrically, and unlike declining balance it always lands exactly on the salvage value without needing a correction in the final year. Over five years the denominators are 5+4+3+2+1 = 15 and the charges follow the fractions 5/15, 4/15, 3/15, 2/15, 1/15.
Common mistakes
- Depreciating the whole cost and ignoring the salvage value: the depreciable base is the difference between cost and salvage, not the full cost.
- Applying the declining-balance percentage to the historic cost rather than to the remaining book value: that produces straight-line charges in disguise.
- Forgetting that tax rules often halve the charge in the first period for assets brought into use part-way through the year: this calculator shows the full accounting schedule, not the tax one.
Frequently asked questions
How do you calculate straight-line depreciation?
Subtract the salvage value from the historic cost and divide by the years of useful life. An asset costing 30,000 with a salvage value of 3,000 over 5 years gives charges of 5,400 a year.
What is the depreciable base?
The part of the cost that actually gets charged over time: historic cost less estimated salvage value. It is the same in every method; only its distribution across the years changes.
When is a declining-balance method preferable?
When the asset gives up most of its usefulness in the early years, or when maintenance costs rise over time and a more even total cost is wanted. Under most accounting frameworks the choice has to be justified.
Does the total depreciated change with the method?
No. By the end of the useful life every method has charged the same depreciable base and brought the asset to the same salvage value. Only the spread across the intervening years differs.
How this calculation works
Depreciable base: B = cost − salvage value. Straight line: annual charge = B/n, with n years of useful life. Declining balance at a fixed percentage p: the charge in year k is the opening book value × p, capped so the book value never falls below the salvage value. Sum-of-years digits: with S = n(n+1)/2, the charge in year k is B · (n − k + 1)/S. In every method the accumulated depreciation is the sum of the charges to date and the book value is cost less accumulated. The schedules shown are accounting ones and apply no first-period tax reduction.
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