Scope and assumptions
Straight-line: equal annual % of cost; salvage is the end value. Illustrative.
An asset doesn't lose value on a schedule the way a calendar says it should — but accounting needs one anyway. Depreciation is that schedule: a planned write-down of the cost across the years the asset earns money.
The percentage form is convenient for comparison, and it carries one trap that catches almost everyone: the denominator is cost, and the total is capped at cost minus salvage.
Straight-line, in one line
Annual depreciation % = (Cost − Salvage) ÷ (Life × Cost) × 100
The numerator is the total depreciable base. Dividing by life spreads it evenly; dividing by cost turns the annual amount into a percentage of the original price.
A machine, worked
$10,000 cost, five-year life, $2,000 salvage:
- Annual amount: (10,000 − 2,000) ÷ 5 = $1,600
- As a percentage of cost: 1,600 ÷ 10,000 = 16% per year
After five years the book value sits at $2,000 — the salvage estimate — not zero.
The salvage trap
Take the shortcut of 100% ÷ 5 = 20% a year and you write the asset down to nothing, overstating the loss by the salvage value. The percentage that's correct is 16%, not 20, and the difference is exactly the $2,000 you expect to recover at the end.
Salvage is a guess, and it's a consequential one. Set it too high and you under-depreciate; too low and you accelerate losses that aren't happening.
Declining balance: front-loaded
Straight-line is even. Declining balance applies a fixed percentage to the shrinking book value, so the early years lose more:
| Year | Opening book | 20% charge | Closing book |
|---|---|---|---|
| 1 | $10,000 | $2,000 | $8,000 |
| 2 | $8,000 | $1,600 | $6,400 |
| 3 | $6,400 | $1,280 | $5,120 |
The rate is constant; the dollars fall. That shape suits vehicles, computers, and anything that loses value fastest when new.
Choosing a method
Straight-line is simplest and matches assets that wear evenly. Declining balance better matches real market loss for fast-obsolescing equipment, and front-loads the expense — which lowers early taxable income, a cash-flow advantage rather than an accounting nicety.
Whichever you choose, apply it consistently and state the salvage assumption. A depreciation figure without those two pieces of context is not comparable to anything.
Depreciation Slips That Distort Resale Value
Ignoring salvage; using the declining book value as the base for a straight-line calculation; confusing the two methods; forgetting the ×100; continuing to depreciate below salvage; and quoting an annual percentage without saying that it's annual.
Related growth & decay guides
For the rest of the growth-and-decay cluster, start at the hub: Population Growth Percentage. Adjacent: Percentage Change Over Time and Percentage Decay Calculation.
FAQ
What's the difference between book depreciation and tax depreciation? Book depreciation follows accounting standards for reporting profit to investors; tax depreciation follows local tax rules, often accelerated, to compute taxable income. The two can legitimately differ for the same asset.
Can land be depreciated? Generally no, because land doesn't wear out. Buildings on the land can be, which is why purchase prices are usually split between the two.
What is MACRS? The Modified Accelerated Cost Recovery System — the US tax depreciation framework, which assigns assets to classes with prescribed accelerated schedules.
Why does declining balance never quite reach zero? Each year removes a percentage of the remaining balance, so the value approaches zero asymptotically. Most systems switch to straight-line near the end, or stop at salvage.
Sources: Investopedia, Depreciation; Corporate Finance Institute, Depreciation.
Disclaimer: Illustrative. Tax depreciation follows local rules; consult a professional. Informational only.
Sources and references
- Investopedia — Depreciationhttps://www.investopedia.com/terms/d/depreciation.asp
- Corporate Finance Institute — Depreciationhttps://corporatefinanceinstitute.com/
Maintenance and corrections
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