Depreciation Expense Calculator

Three figures come out of every depreciation calculation, and they are easy to confuse.

Depreciation expense is the charge for one period. Under the straight-line method:

$D = \frac{C - S}{L}$

with $C$ the cost (purchase price plus everything needed to put the asset into service), $S$ the estimated salvage value and $L$ the useful life in years.

Accumulated depreciation is the running total of every expense charged so far — a contra-asset that only grows:

$A_t = \sum_{j=1}^{t} D_j \;=\; tD \text{ (straight-line)}$

Book value is what remains on the balance sheet:

$B_t = C - A_t$

Book value can never fall below $S$, and $A_t$ can never exceed $C - S$. Those two constraints are the fastest sanity check on any schedule. The expense hits the income statement each period; accumulated depreciation and book value are cumulative positions at a point in time.

The first and last year

An asset rarely enters service on the first day of a year. Prorate by months in service:

$D_{\text{first}} = \frac{C - S}{L} \times \frac{m}{12}$

where $m$ is the number of months from the in-service date to year end. The remainder, $D(1 - m/12)$, spills into an extra final year. Some conventions instead assume a half-year ($m = 6$) for every asset regardless of date; which convention applies to you is set by accounting standards or tax rules, not by arithmetic.

Depreciation rate

$\text{rate} = \frac{1}{L} \quad \text{(of the depreciable base)}, \qquad \text{rate}_{\text{DDB}} = \frac{2}{L} \quad \text{(of book value)}$

Accelerated expense

Declining balance charges $D_t = B_{t-1} \times \text{rate}$, so the expense falls every year while accumulated depreciation climbs quickly. Systems such as MACRS work from prescribed percentage tables and class lives published by the tax authority; enter the applicable percentage and this page will apply it, but it does not carry those tables and cannot tell you which class an asset falls into. That is a rules question, not a maths question.

• Confusing expense with accumulated depreciation: $D$ is one period's charge; $A_t$ is the running total. A five-year-old asset at \6{,}000$a year has$D = 6{,}000$and$A_5 = 30{,}000$.
• Depreciating below salvage: cap the last charge so $B$ lands exactly on $S$.
• Omitting costs of getting the asset ready: delivery, installation and testing usually belong in $C$, which changes every figure downstream.
• Charging a full year for a partial year: an asset in service from 1 October gets $3/12$ of the annual charge, not all of it.
• Forgetting the spillover year: prorating the first year pushes the balance into an extra period, so a 9-year life spans 10 fiscal years.
• Applying the DDB rate to the depreciable base: DDB multiplies book value, and salvage is not subtracted first.
• Treating book value as market value: book value is an accounting figure produced by a chosen method. What the asset would actually sell for is unrelated.