Depreciation Calculator

An expense with no money attached to it

You buy a delivery van for 50,000. You hand over the cash on one day, but the van will be earning for you for a decade. Recording the whole 50,000 as an expense in the month you bought it would make that month look terrible and every following year look better than it was. So accounting spreads the cost across the years the van actually serves, and that spreading is depreciation.

Which leads to the thing most people get wrong about it. Depreciation is not an attempt to track what your van is worth. It is a method for allocating a cost you have already paid across the periods that benefit from it. The book value this calculator gives you is an accounting figure, not a price anyone would pay. A fully depreciated machine still running well has a book value of nothing and a real value of quite a lot.

Five boxes, and one that is not what it sounds like

Original cost is what you paid, including the costs of getting the asset ready to use, such as delivery and installation. Residual value is what you expect it to be worth at the end, sometimes called salvage or scrap value. Lifetime is how many years you expect to use it.

End book value after asks for a year number rather than an amount. Enter 3 and the tool tells you where things stand at the end of year three. It has to be within the lifetime you entered.

Depreciation method offers three choices: straight line, declining balance, and sum-of-years' digits. They produce very different answers from identical inputs, which is the subject of most of this page.

You get back the depreciation expense for that year and the book value at the end of it. Choose declining balance and you also get the rate the tool worked out, which is worth a look and gets its own section below.

One asset, three methods

Take a 50,000 asset with a 5,000 residual value over ten years, and run the same asset through all three methods.

Look at year three. The same asset, on the same day, has a book value of 36,500, 27,909, or 25,059 depending purely on a method chosen years earlier. A spread of more than eleven thousand on an identical piece of equipment, and none of the three is wrong.

The total never changes, only the timing

Now look at the bottom row, because it settles what the method actually does.

At year ten, all three methods arrive at a book value of exactly 5,000. Add up the expense across the full ten years under each method and every one totals exactly 45,000, which is the original cost less the residual value. Not approximately. Exactly.

That is the single most clarifying fact about depreciation. The method does not change how much gets written off. It only changes when. Straight line spreads it evenly, the accelerated methods take more early and less late, and the finish line is identical for all of them.

Which reframes what you are choosing when you pick a method. You are not choosing how much the asset costs you, that was settled when you bought it. You are choosing the shape of the expense over time, and therefore which years look better and which look worse. That shape has real consequences for reported profit and for tax, but it never alters the total.

What the declining balance rate is quietly doing

Choose declining balance and the tool shows you a rate it worked out for itself, 20.57 percent in the example above. That figure is not arbitrary and it is not the rate you will meet most often, so it is worth understanding.

Most declining balance you encounter uses a fixed multiple of the straight line rate, such as double declining balance at twice the straight line rate. Those methods have a known awkwardness: applying a fixed percentage to a shrinking balance approaches zero without ever arriving, so they overshoot or undershoot the residual value and need a correction near the end.

This tool solves it from the other direction. It works backwards from your residual value to find the single constant rate that, applied year after year, lands exactly on that residual at the end of the lifetime. That is why the ten-year book value comes out at precisely 5,000. The trade is that the rate is derived rather than chosen, so it will not match a tax schedule that specifies its own percentage. If you want to apply a rate you have been given, the Depreciation Comparison Calculator lets you set the percentage yourself.

Which method suits which asset

The honest answer is that the choice should follow the pattern in which the asset actually delivers value, and there are recognisable cases.

Straight line fits assets that give roughly equal service each year: buildings, furniture, fixtures. It is also the most common choice for financial reporting simply because it is predictable, and a steady expense keeps reported profit smooth rather than lumpy.

Accelerated methods fit assets that are most useful when new and lose ground steadily: vehicles, computers, machinery facing obsolescence. There is a second argument for them that is easy to miss. Maintenance costs on most equipment rise as it ages, so pairing heavy depreciation early with light maintenance early, and light depreciation later with heavy maintenance later, produces a total cost of ownership that stays roughly level across the years. That is a genuinely elegant reason to accelerate, quite apart from tax.

Between the two accelerated options, declining balance is the more aggressive in the early years, while sum-of-years' digits is a gentler slope. In the table above, declining balance takes 10,284 in year one against the sum-of-years' 8,182. Pick the one whose shape matches how the asset really behaves.

One practical note. For US tax purposes the choice is largely made for you, since the tax code specifies its own system with prescribed recovery periods, and most businesses keep one schedule for their financial statements and another for their tax return. That is normal practice rather than anything irregular.

Questions people ask

Does depreciation tell me what my asset is worth?

No. It allocates a cost you already paid across the years of use. Book value is an accounting figure and can differ enormously from what the asset would sell for.

What do I enter for "end book value after"?

A year number, not an amount. Enter 3 to see the depreciation expense and book value at the end of year three. It must be within the lifetime you entered.

Does the method change how much I depreciate in total?

No. Every method writes off the same total, the original cost less the residual value, and reaches the same final book value. Only the year-by-year distribution differs.

What if the asset will be worth nothing at the end?

Straight line and sum-of-years' digits handle a residual of zero cleanly, writing off the full cost. Declining balance does not, because a rate calculated to reach zero would write everything off immediately, so give it a small realistic residual value instead.

References

The methods follow standard accounting practice, and the US tax treatment comes from the source below.

1. Internal Revenue Service. Publication 946, How To Depreciate Property (recovery periods, methods, and conventions for tax depreciation). irs.gov
2. OpenStax. Principles of Accounting, Volume 1: Financial Accounting, chapter 11 (depreciation methods, and the equality of total depreciation across methods). openstax.org