The four depreciation methods
Straight-line charges the same amount every year and suits assets that give the same service each year, such as office furniture. Declining balance charges a fixed percentage of the remaining book value, so most of the cost is expensed early; double declining uses twice the straight-line rate. Sum-of-the-years’-digits also front-loads the charge: for a 5-year life the years add up to 15, so year 1 takes 5/15 of the depreciable amount, year 2 takes 4/15 and so on. Units of production ties the charge to use, such as machine hours, units made or kilometres driven, so a busy year carries more depreciation.
Choosing a method
Under IFRS (IAS 16), depreciation should follow the expected pattern in which the asset’s future economic benefits are used up. In May 2014 the International Accounting Standards Board clarified, in amendments to IAS 16 and IAS 38 effective from 1 January 2016, that revenue-based methods are not appropriate for property, plant and equipment, because the revenue from an activity generally reflects factors other than the use of the asset. The methods on this page follow time or physical use. Which one fits your asset, and the useful life and residual value to use, is a judgement for your business and its accountant or auditor; the calculator only does the arithmetic.
Residual value, useful life and rounding
The depreciable amount is the cost minus the residual value, the amount you expect to get for the asset at the end of its life. No method takes the book value below the residual value: the last charge is cut to stop exactly there. Straight-line and sum-of-the-years’-digits always end on the residual value, and the schedule rounds each year to two decimals with the last year absorbing the rounding, so the total equals the depreciable amount. The calculator works in whole years from the start of use; if the asset was bought part-way through a year, many businesses charge a part-year in the first and last years, which you can apply to the yearly figures.
Declining balance and the switch to straight-line
A pure declining balance never reaches the residual value, because each year takes only a percentage of what is left. That is why it is common to switch to straight-line once spreading the remaining amount evenly over the remaining years gives a higher charge. With the switch ticked, the schedule makes that change automatically, marks the year it happens and ends on the residual value. Without it, the last row shows the book value still above the residual value, which you may write off when the asset is sold or scrapped.
Accounting and tax depreciation
The figures here are for book-keeping, budgeting and study. Tax rules on depreciation are set by each country’s tax law and may allow different rates, lives or methods from the ones in your accounts, so this calculator does not apply any tax rules. Ask your accountant or check your tax authority’s guidance before using a schedule in a tax return.