Accounting explainer
How an Asset Wears Down
A van, a saw or an oven serves a business for years, so its cost is not charged all at once. Depreciation spreads the cost, less what the asset will still be worth at the end (its salvage value), over its useful life. The three common methods spread it differently; all three end at the same place.
Book value at the end of each year
- straight-line
- double-declining
- units of production
- salvage value
Straight-line schedule
| Year | Miles | Start value | Depreciation | Accumulated | End value |
|---|---|---|---|---|---|
Start and end values are book value: cost minus all depreciation so far.
Year 1 in a spreadsheet
What to notice
Straight-line charges the same amount every year: a straight, steady slope down to salvage.
Double-declining balance charges twice the straight-line rate on whatever book value is left, so it takes big bites early and small ones late. Salvage is ignored in the rate, but book value may never go below it.
Units of production follows use: a year of heavy driving costs more than a quiet one.
Every method charges the same total, cost minus salvage, if the asset is used as expected. Only the timing differs.
Why it works
Straight-line: (cost − salvage) ÷ life each year. Double-declining: book value × 2 ÷ life. Units of production: (cost − salvage) ÷ total units per unit, times the units used.
Taking a fixed fraction of a shrinking balance can leave book value stuck above salvage when the life runs out. So many businesses switch to straight-line in the year when spreading what is left evenly over the remaining years gives the bigger charge. Spreadsheets do the switch with =VDB; plain =DDB does not switch.
Depreciation moves no cash. It is a cost recorded each year so that the income statement matches what the business used up to earn that year’s income. Tax rules (such as MACRS in the United States) set their own lives and methods.
Try it
- Van: find straight-line depreciation by hand. What is the book value after 3 years?
- Van, double-declining: why is year 5 only $147.20?
- Bakery oven, double-declining: in which year does it switch to straight-line? Untick the switch. Where does book value end, and why is that a problem?
- Van, units of production: change year 1 to 50,000 miles. Which years change, and why?
- Which method gives the biggest expense in year 1? Which gives the biggest profit in year 1?
Full years only: each method starts on the first day of year 1 (no half-year or mid-month convention). Figures are computed in your browser and shown to the cent. No outside code, images or trackers.