How to Calculate Depreciation: Straight-Line and Declining Balance
Depreciation spreads the cost of an asset over its useful life. These two methods cover most small-business cases, with numbers you can check.
The example asset
Equipment costs $10,000, will be worth $1,000 at the end of 5 years (salvage value), and has a 5-year life.
Straight-line method
Annual depreciation = (cost – salvage) / life = (10,000 – 1,000) / 5 = $1,800 per year. Book value falls evenly: 8,200, 6,400, 4,600, 2,800, 1,000.
In Excel: =SLN(10000,1000,5) returns 1,800.
Double-declining balance method
This front-loads depreciation. The rate is 2 / life = 40%. Each year apply it to the remaining book value, but never depreciate below salvage value.
| Year | Calculation | Depreciation | Book value end |
|---|---|---|---|
| 1 | 10,000 x 40% | 4,000 | 6,000 |
| 2 | 6,000 x 40% | 2,400 | 3,600 |
| 3 | 3,600 x 40% | 1,440 | 2,160 |
| 4 | 2,160 x 40% | 864 | 1,296 |
| 5 | Limited to reach 1,000 salvage | 296 | 1,000 |
Total depreciation is 9,000, the same as straight-line, but more of it comes earlier. In Excel: =DDB(10000,1000,5,1) returns 4,000 for year 1 and =DDB(10000,1000,5,5) returns 296 for year 5.
Which method?
- Straight-line: simple and common in financial statements.
- Declining balance: suits assets that lose value fast, such as vehicles and computers.
Tax depreciation has its own rules, for example MACRS in the US, which can differ from book depreciation. Confirm with a tax professional before filing.
Use the calculator
Check your own numbers with the depreciation calculator. For the cash side of a purchase, see our cash flow template.
Free pricing tips for your business
Get short, practical tips on pricing jobs and using our free calculators. No spam, unsubscribe any time.
Frequently asked questions
What is salvage value?
The estimated value of the asset at the end of its useful life.
Can I depreciate land?
No. Land is generally not depreciable. Buildings on it are.
What is the difference between depreciation and amortization?
Depreciation applies to physical assets. Amortization applies to intangible assets or loan balances.
Is depreciation a cash expense?
No. It is a non-cash expense that allocates the cost over time.
Need help with your numbers or a custom spreadsheet?
Talk to usMore free tools: All free tools · Depreciation calculator · Cash flow template · Gross profit calculator