Depreciation Calculator
Calculate the depreciation of an asset over its useful life using common methods: Straight-Line, Sum-of-the-Years'-Digits (SYD), or Double Declining Balance (DDB).
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Understanding Depreciation
Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It represents how much of an asset's value has been used up in a given period. Businesses use depreciation for financial reporting and tax purposes.
Depreciation Methods Calculated:
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Straight-Line Method: The simplest and most common method. It evenly spreads the depreciable cost (Asset Cost - Salvage Value) over the asset's useful life.
Formula: Annual Depreciation = (Cost - Salvage Value) / Useful Life -
Sum-of-the-Years'-Digits (SYD): An accelerated depreciation method that recognizes larger depreciation expenses in the early years of an asset's life and smaller expenses in later years.
Formula: Annual Depr. = (Remaining Life / SYD) × (Cost - Salvage Value)
Where SYD = n(n+1)/2, and n = Useful Life -
Double Declining Balance (DDB): Another accelerated method. It applies a fixed rate (double the straight-line rate) to the asset's book value at the beginning of each year. Depreciation stops when the book value reaches the salvage value.
Formula: Annual Depr. = Beginning Book Value × (2 / Useful Life)
Constraint: Book value cannot fall below salvage value.
Key Terms:
- Asset Cost: The original purchase price plus any costs incurred to get the asset ready for use.
- Salvage Value: The estimated resale value of an asset at the end of its useful life.
- Useful Life: The estimated period over which an asset is expected to be used by the business.
- Book Value: The asset's cost minus its accumulated depreciation.
- Accumulated Depreciation: The total amount of depreciation expense recorded for an asset since it was acquired.
Importance:
- Matches the cost of an asset to the revenue it helps generate over time (Matching Principle).
- Affects reported net income and taxable income.
- Helps track the decline in an asset's value on the balance sheet.
Frequently Asked Questions (FAQs)
Which depreciation method should I use?
The choice depends on the asset's expected pattern of use and company accounting policy. Straight-line is simple and common. Accelerated methods (SYD, DDB) may better reflect assets that are more productive in early years or for tax planning purposes where allowed.
Does depreciation involve actual cash outflow?
No. Depreciation is a non-cash expense. The cash outflow occurred when the asset was purchased. Depreciation allocates that initial cost over time on the income statement.
Can land be depreciated?
No, land is generally considered to have an indefinite useful life and does not wear out, so it is not depreciated (though improvements on the land, like buildings, are).
