📉 Depreciation Calculator
📘 Understanding Depreciation Methods
Depreciation is the accounting process of allocating the cost of tangible assets over their useful lives. Different methods provide different patterns of expense recognition:
- Straight Line: Equal depreciation expense each year. Formula: (Cost - Salvage Value) / Useful Life
- Double Declining Balance: Accelerated method with higher expenses in early years. Formula: 2 × Straight-Line Rate × Book Value at Beginning of Year
- Sum of the Years' Digits: Accelerated method using a fraction based on remaining life. Formula: (Remaining Life / Sum of Years' Digits) × (Cost - Salvage Value)
The choice of method affects financial statements and tax obligations. Straight-line is simplest, while accelerated methods better match expense with actual asset usage patterns.
💡 Depreciation Strategy Tips
- Choose straight-line for consistency and simplicity in financial reporting
- Consider accelerated methods for assets that lose value quickly in early years
- Check tax regulations in your country - some jurisdictions specify allowed methods
- Review asset useful lives regularly - technology assets may need shorter depreciation periods
- Consider Section 179 deduction (US) for immediate expensing of qualifying assets
- Maintain detailed records of asset purchases, improvements, and disposal dates
🤔 Frequently Asked Questions
What's the difference between depreciation and amortization?
Depreciation applies to tangible assets (equipment, vehicles, buildings), while amortization applies to intangible assets (patents, copyrights, goodwill). Both allocate cost over useful life but follow different accounting rules.
Can I change depreciation methods later?
Yes, but accounting standards generally require justification for the change and may require restating prior financial statements. The new method should be applied prospectively unless it's a correction of an error.
How does depreciation affect taxes?
Depreciation reduces taxable income by recognizing asset cost over time. Different tax jurisdictions have specific rules about depreciation methods, recovery periods, and conventions (half-year, mid-quarter).
What is MACRS depreciation?
MACRS (Modified Accelerated Cost Recovery System) is the current tax depreciation system in the United States. It specifies recovery periods and methods for different classes of assets, often using accelerated methods.
How do I determine useful life and salvage value?
Useful life is based on how long the asset will productively be used. Salvage value is the estimated resale value at end of useful life. Both require reasonable estimation based on industry standards, manufacturer information, and company experience.