Almost nothing a business buys keeps its value forever. A delivery van, a laptop, a piece of machinery — each one is used up gradually until it is eventually worthless or sold for scrap. Accounting turns that gradual wearing-out into a real number by spreading the asset's cost over the years it is used, a process called depreciation. The depreciation calculator on this page applies the two most common methods, straight-line and declining balance, so you can see the annual expense, the running total, and the asset's book value at any point in its life.
Depreciation matters in two different ways at once. It is an accounting convention that allocates cost to the years that benefit from the asset, and it is a tax deduction that can reduce taxable income. This article explains both methods, walks through a full example, and clarifies how book value, salvage value, and useful life fit together.
What depreciation actually measures
When a company buys an asset that will last several years, generally accepted accounting principles say the cost should not hit the income statement all at once. Instead, the cost is matched to the years in which the asset produces value, a concept known as matching. Depreciation is the mechanism that performs this matching: each year, a portion of the asset's cost is recognized as an expense, and the asset's value on the balance sheet is reduced by the same amount.
Three numbers drive every depreciation calculation. The asset cost is the amount paid to acquire and ready the asset for use, including purchase price and any costs to install or transport it. The salvage value is the estimated amount the asset will be worth at the end of its useful life, whether through resale or scrap. The useful life is the number of years the business expects to use the asset. Together they determine how much depreciable cost there is — the cost minus the salvage value — and over how long it is spread.
Straight-line depreciation, step by step
The straight-line method is the simplest and most widely used approach. It takes the depreciable cost, the asset cost minus the salvage value, and divides it evenly by the useful life. Every year of the life records the same depreciation expense. A machine bought for $10,000 with a salvage value of $1,000 and a five-year life has a depreciable cost of $9,000, giving an annual expense of $1,800 for each of the five years.
The book value after any year is simply the original cost minus the accumulated depreciation recorded so far. After the second year of the example, $3,600 of depreciation has been accumulated, so the book value is $6,400. In the final year the accumulated depreciation reaches the full $9,000, and the book value lands exactly on the $1,000 salvage value. Because the numbers are so predictable, straight-line depreciation is favored for assets whose value declines steadily, such as office furniture, buildings, and many types of equipment, and it is the method this calculator uses by default.
Declining balance depreciation
Not every asset loses value evenly. Vehicles, computers, and machinery often lose value fastest in their early years, which is where the declining balance method comes in. Instead of a flat amount, it applies a fixed percentage to the remaining book value each year. Because the book value shrinks every year, the depreciation expense also shrinks, producing a front-loaded pattern that mirrors how many real assets lose value.
Under a 20 percent declining balance on the same $10,000 machine, the first year's depreciation is 20 percent of $10,000, or $2,000, leaving a book value of $8,000. The second year charges 20 percent of $8,000, or $1,600, leaving $6,400. The third year charges $1,280, and so on. Each year the expense is smaller than the last, which is why the method is described as accelerated. The residual value at the end of a given life is simply the cost multiplied by one minus the rate, all raised to the power of the number of years.
There is an important difference between the two methods worth flagging. Straight-line forces the book value down to exactly the salvage value at the end of the life. Declining balance does not; it compounds the percentage and the final residual may end up above or below the salvage value. Many businesses use a hybrid, switching from declining balance to straight-line partway through the life to land precisely on salvage, a nuance this simple model does not attempt.
Reading the results
Five outputs summarize the calculation. Straight-line annual depreciation is the flat yearly expense under that method, useful as a reference regardless of which method you chose. Depreciation in the chosen year shows the expense recorded in the specific year you selected, which is constant under straight-line but declines under declining balance. Accumulated depreciation is the total recorded through that year, and book value is the asset's worth after subtracting that total from the original cost.
The fifth output, residual value at the end of the useful life, closes the picture by showing what the asset is projected to be worth when its life ends. Under straight-line that residual equals the salvage value you entered. Under declining balance it reflects the compounding of the rate over the full life, which may differ from the salvage value. The chart on this page plots the book value and accumulated depreciation across every year of the life, making the shape of each method instantly visible: a straight diagonal slide for straight-line, and a steep-then-flattening curve for declining balance.
Working through a full example
Follow the defaults to see both methods on the same asset. A $10,000 machine with a $1,000 salvage value and a five-year useful life, inspected at year two. Under straight-line, annual depreciation is $1,800 every year. In year two the expense is still $1,800, accumulated depreciation reaches $3,600, and the book value is $6,400. The residual at the end of the life is exactly the $1,000 salvage value.
Switch to declining balance at 20 percent and the same machine tells a different story. Year two records a depreciation expense of $1,600, because the rate applies to the $8,000 book value left after year one. Accumulated depreciation is $3,600 and the book value is $6,400, coincidentally the same totals as straight-line in this particular year. The residual after five years under this rate is about $3,276, well above the $1,000 salvage value, showing that this declining balance rate under-depreciates the asset relative to its salvage. Comparing the two outputs side by side is the quickest way to understand how method choice changes the picture.
Depreciation and taxes
Depreciation is not only an accounting convention; it is also a real tax deduction. When a business deducts depreciation, it reduces its taxable income by the amount of the annual expense, even though no cash actually leaves the company in that year. The cash was already spent when the asset was bought, so depreciation is what accountants call a non-cash expense that still lowers the tax bill by spreading the deduction across the asset's life.
Tax rules, however, frequently diverge from the accounting methods on this page. In many jurisdictions, tax systems use their own accelerated schedules, such as the Modified Accelerated Cost Recovery System, or MACRS, in the United States, which assigns each asset class a fixed depreciation period and pattern. Tax depreciation can also include bonus depreciation or full expensing provisions that change year to year. As a result, the depreciation a business reports for tax purposes can differ markedly from the straight-line or declining balance figures shown here, which model financial accounting rather than a specific tax code. For actual tax planning, consult the current rules or a tax professional.
Common mistakes to avoid
- Ignoring salvage value. Depreciating an asset down to zero when it still has resale value overstates the annual expense under straight-line.
- Applying declining balance without a switch. A pure declining balance rarely lands on the salvage value, so many real plans switch to straight-line partway through the life.
- Confusing accumulated depreciation with current expense. The annual charge is a flow, while accumulated depreciation is the running stock of all prior charges.
- Using the wrong useful life. Life estimates vary by asset and practice; an incorrect life misstates every year's expense.
- Mixing tax and book methods. MACRS-style tax schedules often differ from financial straight-line or declining balance, so keep the two separate.
Putting the calculator to work
Start with the numbers that describe the asset: its purchase cost, the salvage value you realistically expect, and the useful life your accounting policy or judgment assigns. Choose straight-line for a simple, even allocation, or declining balance if the asset loses value fastest in its early years and you want a front-loaded expense. Then select the year you want to inspect to see the expense, the running total, and the book value for that specific point in time.
Use the chart to see the whole trajectory at a glance, and toggle between the methods to understand how the choice changes both the annual numbers and the book value curve. Whether you are forecasting maintenance, reporting on a fleet, or estimating what a used asset is worth, the book value output gives you a defensible, reproducible number built on just three inputs and a clear formula.
Disclaimer
Results are provided as estimates for informational purposes only and may be inaccurate. Always verify outcomes with a qualified professional before making financial or personal decisions based on these calculations.