What it calculates

A depreciation schedule spreads the cost of a fixed asset across the years it is used, rather than expensing it all at purchase. It drives both the book expense that hits your income statement and the tax deduction that reduces cash tax, and those two are rarely the same number.

How it is calculated

Straight line divides the depreciable base by the useful life, giving an identical charge every year. Declining balance applies a fixed percentage to the shrinking net book value, front-loading the expense. Sum-of-years-digits does something similar with a fractional weighting. Units of production ties the charge to actual output instead of time. The depreciable base is cost less salvage value, except under most accelerated tax systems, which ignore salvage entirely.

How to read the result

Total depreciation over an asset's life is the same under every method - only the timing changes. That timing is the whole point: accelerating deductions pulls tax savings forward, and money now is worth more than money later. Watch the gap between book and tax depreciation, because it is what creates deferred tax liabilities. A rising gap means you are deferring cash tax, which is a genuine financing benefit and not an accounting trick.

Worked example

An asset costs 100,000 with a 10,000 salvage value and a 5-year life. Straight line charges (100,000 - 10,000) / 5 = 18,000 every year. Double declining balance charges 40% of book value: 40,000 in year one, 24,000 in year two, 14,400 in year three - front-loading 78,400 of the total into the first three years against 54,000 on straight line.

Common questions

Why do companies use different methods for books and tax?

Because the two have different purposes. Book depreciation aims to match expense to the economic use of the asset for investors. Tax depreciation follows statutory schedules designed partly as investment incentives. Using straight line for books and an accelerated method for tax is normal and entirely legitimate.

What is salvage value and does it always apply?

It is the estimated amount recoverable at the end of the useful life, and it reduces the depreciable base for book purposes. Most accelerated tax regimes, including MACRS in the United States, ignore salvage and let you depreciate the full cost.

What happens if I sell the asset early?

You compare the sale price to the remaining net book value. Selling above it produces a gain, and to the extent that gain reflects depreciation already deducted it is usually recaptured and taxed as ordinary income rather than as a capital gain.