How to Calculate Depreciation: Methods and Examples

Quick answer: Here is how to calculate depreciation with the straight-line method: subtract the asset's salvage value from its cost and divide by its useful life: (cost − salvage value) ÷ useful life = annual depreciation. Declining balance and units-of-production methods spread the same cost differently, front-loading it or tying it to actual use.

When you buy a laptop, a van or a piece of machinery, the cost does not belong to a single month. The asset helps you earn revenue for years, so accounting spreads its cost across that period. This guide explains how to calculate depreciation step by step using the three most common methods, with a worked example for each, plus a comparison table, a checklist and the mistakes that trip up small businesses. It finishes with short notes on US tax depreciation (MACRS and Section 179) and UK capital allowances.

Depreciation is a bookkeeping and tax topic, so you will do these calculations in a spreadsheet or accounting software. Our free invoice generator builds PDF invoices; it does not keep asset registers or books.

What depreciation is and why it matters

Depreciation is the systematic allocation of a long-term asset's cost over its useful life. It matches the expense of the asset to the periods in which it helps generate income. Without it, the year you bought equipment would show an artificially large loss and later years would look too profitable.

Depreciation shows up in two places:

• The income statement, as depreciation expense, usually within operating expenses.
• The balance sheet, as accumulated depreciation, which reduces the asset's recorded cost to its book value. Our guide to the small business balance sheet shows where it sits.

Only assets that are bought rather than consumed, and that last more than a year, are depreciated. That is the core of the CapEx vs OpEx distinction: a printer is capitalized and depreciated, while printer ink is expensed immediately.

How to calculate depreciation: the inputs you need

• Cost: the purchase price plus costs to get the asset ready for use, such as delivery, installation and setup. Exclude refundable sales tax or VAT you can reclaim.
• Salvage value: your realistic estimate of what the asset will be worth at the end of its useful life. Zero is common for small items.
• Useful life: how long you expect to use the asset, in years, or in units such as machine hours or miles.
• Placed-in-service date: when the asset is ready for use, which is when depreciation starts.

Depreciable base = cost − salvage value. Whichever schedule you pick, how to calculate depreciation always starts from this number. Every method below allocates this same base; they just allocate it on different schedules.

Method 1: straight-line depreciation

Formula: annual depreciation = (cost − salvage value) ÷ useful life in years

Illustrative example: A bakery buys a commercial mixer for $12,000 including delivery. It expects to use it for five years and sell it for $2,000 at the end.

• Depreciable base: $12,000 − $2,000 = $10,000
• Annual depreciation: $10,000 ÷ 5 = $2,000
• Monthly depreciation: $2,000 ÷ 12 ≈ $166.67
• Book value after year 3: $12,000 − (3 × $2,000) = $6,000

Straight-line is the default for most small businesses' own books because it is simple and predictable. If the mixer is bought mid-year, depreciate only the months it was in service in the first year.

Method 2: declining balance and double-declining balance

Declining balance applies a fixed rate to the asset's book value at the start of each year, so the expense is highest in year one and shrinks over time. This suits assets that lose value fastest when new, such as vehicles and computers.

Formula: annual depreciation = book value at start of year × rate. For double-declining balance (DDB), rate = 2 ÷ useful life.

Using the same mixer, the DDB rate is 2 ÷ 5 = 40%. Salvage value is ignored when applying the rate, but the asset is never depreciated below salvage value.

Year	Opening book value	Calculation	Depreciation	Closing book value
1	$12,000	$12,000 × 40%	$4,800	$7,200
2	$7,200	$7,200 × 40%	$2,880	$4,320
3	$4,320	$4,320 × 40%	$1,728	$2,592
4	$2,592	Limited to reach $2,000 salvage	$592	$2,000
5	$2,000	Fully depreciated	$0	$2,000
Total			$10,000

Check: $4,800 + $2,880 + $1,728 + $592 = $10,000, the same depreciable base as straight-line. In year 4, 40% of $2,592 would be $1,036.80, which would push book value below salvage, so the charge is capped at $592. Many businesses instead switch to straight-line once it gives a larger charge than the declining rate; US MACRS builds that switch into its tables.

Method 3: units-of-production depreciation

This method ties depreciation to actual use, which suits machinery, vehicles and equipment whose wear depends on how hard they work.

Formula: depreciation per unit = (cost − salvage value) ÷ total expected units; annual depreciation = units produced in the year × depreciation per unit.

Suppose the mixer is expected to run 5,000 batches over its life.

• Per-batch rate: $10,000 ÷ 5,000 = $2.00 per batch
• Year 1, a busy year of 1,400 batches: 1,400 × $2.00 = $2,800
• Year 2, a slower year of 800 batches: 800 × $2.00 = $1,600

The expense now rises and falls with output, which can give a more accurate gross margin for manufacturers. The trade-off is that you must record usage reliably.

A fourth option: sum-of-the-years' digits

Add the digits of the useful life (for five years, 5 + 4 + 3 + 2 + 1 = 15). Year 1 depreciation is 5/15 of the base, year 2 is 4/15, and so on. For the mixer, year 1 is $10,000 × 5 ÷ 15 ≈ $3,333.33. It front-loads expense less aggressively than DDB.

Comparing the methods

Method	Year 1 expense (mixer)	Pattern	Good fit for
Straight-line	$2,000	Even every year	Furniture, fit-outs, most general assets
Double-declining balance	$4,800	High early, falling	Computers, vehicles, technology
Sum-of-the-years' digits	$3,333.33	High early, falling more gently	Assets that lose productivity steadily
Units of production	$2,800 (1,400 batches)	Varies with use	Machinery, delivery vehicles

The table shows that the question of how to calculate depreciation is really a question of timing. All four methods depreciate the same $10,000 in total; they differ only in timing. Timing still matters, because it changes reported profit year by year, which affects the figures on your profit and loss statement and what lenders see.

Tax depreciation in the US: MACRS, Section 179 and bonus depreciation

The figures above are book depreciation. US federal tax depreciation follows its own rules, set out in IRS Publication 946, How To Depreciate Property.

• MACRS (Modified Accelerated Cost Recovery System) assigns each asset type a recovery period, such as five years for computers, cars and light trucks and seven years for office furniture. It generally uses a 200% declining balance that switches to straight-line, ignores salvage value and applies conventions such as the half-year convention. For five-year property under the half-year convention, the IRS table rates are 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76% over six tax years.
• Section 179 lets a business elect to deduct the cost of qualifying property in the year it is placed in service instead of depreciating it. According to IRS Rev. Proc. 2025-32, the 2026 maximum is $2,560,000, reduced dollar for dollar once qualifying purchases exceed $4,090,000. The deduction is also limited to business taxable income, and SUVs have a lower cap.
• Bonus depreciation (the special depreciation allowance) was restored to 100% for qualifying property acquired after January 19, 2025, under the 2025 tax law, with the option to elect out or, for the first tax year ending after that date, to elect a lower rate.

These limits and elections change, and vehicles, listed property and real estate have special rules. Confirm current figures in Publication 946 and the Form 4562 instructions, or with a tax professional, before filing. Sole proprietors report the result on Schedule C; see our guide to Schedule C for freelancers.

UK note: capital allowances instead of depreciation

In the UK, depreciation in your accounts is not deductible for tax. You add it back and claim capital allowances instead. The Annual Investment Allowance on GOV.UK is currently £1 million a year for qualifying plant and machinery. Spending above that, or on assets the AIA does not cover, goes into writing down allowances; the government announced a cut to the main rate from 18% to 14% from April 2026, alongside a new 40% first-year allowance for certain expenditure from January 2026. Cars follow separate rules based on emissions. Sole traders using the cash basis can usually deduct equipment as an expense instead. Check current GOV.UK guidance when you complete your Self Assessment tax return.

Checklist: setting up depreciation for your business

• Set a capitalization threshold (for example, items over a set amount are capitalized) and apply it consistently.
• Create a fixed asset register with description, purchase date, placed-in-service date, cost, salvage value, useful life and method.
• Keep the supplier invoice and proof of payment for every asset.
• Choose a book method for each asset class and document why.
• Record depreciation monthly or quarterly, not just at year end.
• Track book and tax depreciation separately if they differ.
• Record disposals: remove the asset and its accumulated depreciation, and book any gain or loss.
• Review useful lives annually and adjust prospectively if expectations change.

Common mistakes when calculating depreciation

• Expensing assets immediately in the books. It distorts monthly profit even when tax rules allow an immediate deduction.
• Depreciating land. Only buildings and improvements wear out; split the purchase price.
• Starting at purchase rather than in-service date. Equipment sitting in a crate is not yet being used.
• Depreciating below salvage value with declining-balance methods.
• Forgetting installation and delivery costs in the asset's cost.
• Mixing up book and tax figures. MACRS or capital allowances rarely match your book depreciation.
• Ignoring personal use. Only the business-use percentage of a vehicle or computer is depreciable for tax.
• Losing records. Without purchase documents, recapture and disposal calculations become guesswork. Good bookkeeping basics prevent this.

Putting it together

Learning how to calculate depreciation comes down to four inputs and a choice of schedule. Start with straight-line for simplicity, use declining balance or units of production where they better reflect how an asset loses value, and keep tax depreciation as a separate calculation governed by IRS or HMRC rules. If you are unsure which tax elections suit your business, ask a qualified accountant before you file, and keep your asset register up to date so the numbers stay reliable from year to year.