When a business buys a fixed asset — a vehicle, a machine, a laptop fleet — it will use that asset for several years. Depreciation is the accounting process that allocates the asset's cost across those years, instead of treating the whole purchase as an expense on the day it was bought. Each period, part of the cost is charged as depreciation expense in the profit and loss account, and the asset's carrying amount on the balance sheet — its net book value — falls by the same amount.
Depreciation is an allocation of cost, not a measurement of market value. A three-year-old van may have a book value quite different from what it would sell for.
The inputs to any depreciation calculation
| Input | Meaning |
|---|---|
| Cost | Purchase price plus costs to get the asset ready for use (delivery, installation) |
| Salvage (residual) value | What you expect to recover at the end of its useful life — see salvage value |
| Useful life | How long you expect to use it, in years or units of output — see useful life |
| Method | How the cost is spread: evenly, front-loaded or by usage |
| In-service date and convention | When depreciation starts, and how partial periods are treated |
The amount to be depreciated over the asset's life — the depreciable base — is cost minus salvage value.
Depreciation methods compared
Using one example throughout: a machine costing $30,000, salvage value $5,000, useful life 5 years — so a depreciable base of $25,000.
| Year | Straight-line | Double-declining balance | Sum-of-years’ digits |
|---|---|---|---|
| 1 | $5,000.00 | $12,000.00 | $8,333.33 |
| 2 | $5,000.00 | $7,200.00 | $6,666.67 |
| 3 | $5,000.00 | $4,320.00 | $5,000.00 |
| 4 | $5,000.00 | $1,480.00 | $3,333.33 |
| 5 | $5,000.00 | $0.00 | $1,666.67 |
| Total | $25,000.00 | $25,000.00 | $25,000.00 |
- [Straight-line](/glossary/straight-line-depreciation) — the same charge every year: ($30,000 − $5,000) ÷ 5 = $5,000.
- [Declining balance](/glossary/declining-balance-depreciation) (reducing balance) — a fixed percentage of the remaining book value each year, so charges are higher early on.
- [Double-declining balance](/glossary/double-declining-balance) — declining balance at twice the straight-line rate (2 × 20% = 40%).
- [Sum-of-years' digits](/glossary/sum-of-years-digits) — front-loaded using fractions 5/15, 4/15, 3/15, 2/15, 1/15.
- [Units of production](/glossary/units-of-production-depreciation) — charge per unit of use (hours, miles, units produced).
- Tax methods such as MACRS in the US or capital allowances in the UK follow rules set by tax law.
Why depreciation matters
- Accurate profit — the cost of using an asset is matched to the periods that benefit from it.
- Accurate balance sheet — assets are carried at a value that reflects their consumption.
- Tax — tax depreciation reduces taxable income, under rules that often differ from the books.
- Replacement planning — assets near the end of their depreciable life are candidates for replacement budgeting.
Book depreciation vs tax depreciation
Many organizations keep two sets of depreciation: book depreciation under their accounting framework (for example IFRS or US GAAP), chosen to reflect how the asset is actually used, and tax depreciation calculated under tax law — which may allow faster write-offs. The totals over the asset's life are usually similar, but the timing differs, creating temporary differences and deferred tax. See book vs tax depreciation.
Things that change a depreciation schedule
- Partial periods — an asset placed in service mid-year usually gets a partial first-year charge (by month, or under a convention such as half-year).
- Changes in estimate — if useful life or salvage value is revised, the remaining NBV is spread over the remaining life going forward; past periods are not restated.
- Impairment — if an asset's recoverable amount falls below its NBV, it may need to be written down.
- Disposal — depreciation stops, and the difference between proceeds and NBV is a gain or loss. See disposal.
Try the numbers yourself in our free depreciation calculator.
How Asetavo handles depreciation
Asetavo (Business plan) supports eight depreciation methods — straight-line, reducing balance, double-declining balance, sum-of-years' digits, units of production, MACRS and UK capital allowances among them — with separate book and tax profiles. Cost, salvage value, useful life and in-service date can be set as defaults per category. Depreciation runs are computed as drafts you can review before posting; only the book run changes NBV, while the tax run is report-only with its own running total. Disposals record gain or loss with an audit trail, and valuation and NBV reports export to Excel or CSV (direct accounting/GL sync is on the roadmap).
