🏭 Depreciation helps businesses and individuals account for the gradual loss in value of tangible assets like vehicles, machinery, and equipment. Understanding how to calculate depreciation expense is essential for budgeting, taxes, and accurate financial reporting.
Let’s explore the most common methods and walk through an easy calculator.
Table of Contents
🙋♀️ What is Depreciation?
Depreciation is the process of allocating the cost of a physical asset over its useful life. Instead of recording the entire cost as an expense in one year, it’s spread out — helping match the asset’s cost with the revenue it generates.
🧾 Common Methods of Calculating Depreciation
1. Straight-Line Method 📏
The most straightforward and commonly used method.
Formula:
Depreciation Expense = (Cost − Salvage Value) ÷ Useful Life
2. Declining Balance Method 📉
Accelerated depreciation with higher expenses early on.
3. Units of Production Method ⚙️
Based on actual usage rather than time.
For this article and calculator, we’ll focus on the Straight-Line Method.
📊 Example: Straight-Line Depreciation
You buy a machine for $10,000 with a salvage value of $1,000. Its useful life is 5 years.
Depreciation = (10,000 − 1,000) ÷ 5 = $1,800 per year
📌 When to Use Depreciation
- For tax deduction over several years
- To calculate net book value of equipment
- For planning equipment replacement
- To assess profitability
📋 Quick Reference Table
| Term | Meaning |
|---|---|
| Asset Cost | Purchase price of the asset |
| Salvage Value | Expected value at end of use |
| Useful Life | Time period asset is expected to work |
| Depreciation | Annual expense over the asset’s life |
✅ Benefits of Calculating Depreciation
- Helps with accurate profit calculations
- Spreads expense over time
- Useful for long-term budgeting and planning
- Required for GAAP and tax compliance
✍️ Final Thoughts
Depreciation might seem complex, but the straight-line method makes it easy to understand and apply. Use the calculator above to get instant results and stay financially accurate.