What is depreciation?
Depreciation spreads the cost of a long-term asset over the years it helps the business earn revenue. Instead of expensing a $50,000 machine all at once, the business records part of the cost as depreciation expense each year.
Three numbers drive every depreciation problem: the asset's cost, its salvage value (what it should be worth at the end) and its useful life.
Depreciation formulas
Worked example
A company buys a machine for $50,000. It expects to use it for 5 years and sell it for $5,000 at the end.
- Straight-line: ($50,000 − $5,000) ÷ 5 = $9,000 per year.
- Double-declining, year 1: rate = 2 ÷ 5 = 40%, so $50,000 × 40% = $20,000.
- Double-declining, year 2: ($50,000 − $20,000) × 40% = $12,000.
Switch the method in the calculator above to see the full schedule for both.
Frequently asked questions
What is depreciation?
Depreciation spreads the cost of a long-term asset, like equipment or a vehicle, over the years it is used. Each year part of the cost becomes an expense.
What is the difference between straight-line and double-declining balance?
Straight-line gives the same expense every year. Double-declining balance gives a larger expense in the early years and a smaller one later, because it applies a fixed rate to a falling book value.
Why doesn't double-declining balance subtract salvage value first?
The double-declining rate is applied to book value, not to cost minus salvage. Salvage value still matters: the asset is never depreciated below it, so the final year is adjusted to end exactly at salvage value.
What is book value?
Book value is the asset's cost minus all depreciation recorded so far (accumulated depreciation).
What is the journal entry for depreciation?
Debit Depreciation Expense and credit Accumulated Depreciation for the year's depreciation amount.