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AccountingFinancial AccountingCollege

Depreciation

Straight-line and declining-balance methods.

Long-lived assets such as machines, vehicles and computers wear out or become obsolete. Depreciation spreads an asset's cost over its useful life, so each year's income statement carries a fair share of the cost rather than all of it in the year of purchase. Land is not depreciated.

Straight-line depreciation charges the same amount every year. Declining-balance methods charge more in early years, which better matches assets that lose value quickly. The book value, cost minus accumulated depreciation, never drops below the estimated salvage value.

Key terms

Straight-line depreciation
Equal expense each year.
cost−salvageuseful life\frac{\text{cost} - \text{salvage}}{\text{useful life}}

Key ideas

  • Straight-line: cost−salvageuseful life\frac{\text{cost} - \text{salvage}}{\text{useful life}} per year.
  • Double-declining balance: 2life×\frac{2}{\text{life}} \times beginning book value.
  • Book value == cost −- accumulated depreciation.
  • Depreciation is a non-cash expense; it reduces profit but not cash.

Worked example

A machine costs $50,000, has a salvage value of $5,000 and a 5-year life. Find straight-line depreciation and book value after 2 years.

  1. Depreciable base: 50,000−5,000=45,00050{,}000 - 5{,}000 = 45{,}000.
  2. Annual depreciation: 45,0005=9,000\frac{45{,}000}{5} = 9{,}000.
  3. After 2 years: accumulated 18,00018{,}000; book value 50,000−18,000=32,00050{,}000 - 18{,}000 = 32{,}000.

Answer: $9,000 per year; book value $32,000

Common mistakes

  • Forgetting to subtract salvage value in straight-line.
  • Subtracting salvage value in the double-declining rate calculation.
  • Depreciating below salvage value.

Practice questions

Try each one, then open the answer. Numerical answers on this page are verified by an automated calculation check.

  1. 1.Straight-line depreciation: cost $12,000, salvage $2,000, life 4 years.

    Show answer

    $2,500

  2. 2.Double-declining first-year depreciation on $20,000 with a 5-year life.

    Show answer

    $8,000

  3. 3.Book value after 3 years of $2,500 depreciation on a $12,000 asset.

    Show answer

    $4,500

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