Depreciation Method Reference

Choosing how an asset loses value

Depreciation spreads the cost of a long-lived asset across the years it is used, matching expense to the benefit it produces. The method you choose changes the timing of that expense — even, front-loaded, or somewhere between — which affects profit and tax in each year. This reference covers the four common methods with their formulas and a live schedule you can run against your own figures.

How it works

Every method starts from three inputs: the asset cost, the salvage (residual) value, and the useful life in years.

Straight-line:   (Cost − Salvage) ÷ Life                  → equal each year
Declining bal.:  BookValue × (factor ÷ Life)              → 1.5 or 2.0 factor
Double-declining: BookValue × (2 ÷ Life)                  → steepest front-load
Sum-of-years:    (Cost − Salvage) × (Remaining ÷ SYD)     → SYD = Life(Life+1)/2

Straight-line and sum-of-years-digits depreciate the cost minus salvage in full over the asset’s life. Declining-balance methods apply their rate to the book value that remains each year and floor the book value at salvage, so the asset is never written below its residual value.

Choosing the right method for your asset

Different assets lose value at different rates, and matching the depreciation method to that pattern produces the most accurate financial statements.

Straight-line is the simplest and most commonly used. It is the right choice for assets that provide roughly equal benefit in each year of their life — buildings, office furniture, software licences, and leasehold improvements. The predictability of equal annual charges simplifies budgeting and makes year-on-year comparisons easier.

Double-declining balance is best for assets that lose the most value in the early years and become less productive over time — vehicles, computers, smartphones, and manufacturing equipment. The front-loaded charge better reflects the economic reality that a new machine is more valuable and productive than an aging one.

Sum-of-years-digits is a middle path: it front-loads depreciation more than straight-line but less aggressively than double-declining balance. Some accountants prefer it for assets where the loss of value is accelerated but not as steep as DDB implies.

150% declining balance is a gentler variant of the double-declining method, using a factor of 1.5 instead of 2. It is common in some tax jurisdictions for specific asset classes.

A full five-year worked example

For a £10,000 asset with £1,000 salvage value and a 5-year life, the four methods produce very different schedules. The depreciable amount (cost minus salvage) is £9,000.

Straight-line: £9,000 ÷ 5 = £1,800 per year, every year.

Double-declining balance (DDB) uses rate = 2 ÷ 5 = 40% applied to book value:

In year 4 and 5, the DDB charge falls below the straight-line charge, so many schedules switch to straight-line in the final years — keeping the larger of the two deductions.

Sum-of-years-digits: SYD = 5+4+3+2+1 = 15. Year-1 fraction = 5/15 × £9,000 = £3,000; Year 2 = 4/15 × £9,000 = £2,400; Year 3 = £1,800; Year 4 = £1,200; Year 5 = £600. Total = £9,000 exactly.

Tax depreciation versus book depreciation

An important distinction: the method you use for financial reporting (book depreciation) and the method required or allowed by your tax authority may be different. For example, in the US the tax system uses a completely separate system (MACRS — Modified Accelerated Cost Recovery System) that does not map directly to the four accounting methods above. In the UK, capital allowances replace depreciation for tax purposes with a different rate structure (Annual Investment Allowance, writing-down allowances at 18% or 6%).

This tool generates a schedule for financial reporting and financial planning purposes. Tax depreciation must be calculated separately using your country’s tax rules — do not use this schedule as a substitute for a tax capital allowances calculation without confirming the applicable rules.

Partial year in the first year

Many assets are placed in service partway through a financial year. There are several conventions for handling the partial first year:

• Half-year convention: treat the asset as placed in service at mid-year, regardless of the actual date. Take half a year’s depreciation in year one and the full amount thereafter.
• Full-month convention: use the actual month placed in service; calculate a fraction of the annual charge based on months remaining in the year.
• Full-year convention: take a full year’s charge in year one regardless.

This tool produces a clean annual schedule; if your asset was placed mid-year, adjust the first year’s figure based on whichever convention your accounting policy requires.

Tips and example

• For a £10,000 asset, £1,000 salvage, 5-year life: straight-line gives £1,800 every year; double-declining gives £4,000 in year one and tapers sharply.
• Use declining balance for vehicles, machinery and electronics that lose most value early; use straight-line for buildings and fixtures that wear evenly.
• Double-declining schedules often switch to straight-line in the final years once that produces a larger deduction — check whether your accounting policy and local tax rules permit or require this switch.
• The salvage value is an estimate; revising it mid-life changes the remaining schedule, not the years already booked.
• Compare the methods side by side in the tool to see how each choice affects profit in each year — which matters when you are setting expectations for lenders, investors, or internal budgets.