Depreciation Methods Explained: Straight-Line, Declining Balance and More
By SimplyCPA · 24 October 2026
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- Purpose: Depreciation spreads an asset's cost, less salvage value, over the periods that benefit from it — it isn't a valuation.
- Straight-line: Equal expense each year — (cost − salvage) ÷ useful life.
- Accelerated methods: Double-declining balance and sum-of-the-years'-digits charge more in early years; never depreciate below salvage value.
- Activity method: Units of production ties expense to actual use.
- Changes: A change in depreciation method is a change in estimate effected by a change in principle — applied prospectively.
What depreciation is (and isn't)
Depreciation allocates the cost of a long-lived asset, less its estimated salvage (residual) value, over its useful life. It isn't an attempt to show what the asset is worth today — falls in value below carrying amount are handled by impairment testing instead.
One asset, four methods
A machine costs $50,000, has a salvage value of $5,000 and a useful life of 5 years (or 100,000 units of output). Depreciable base = $45,000.
| Year | Straight-line | Double-declining balance | Sum-of-the-years'-digits |
|---|---|---|---|
| 1 | $9,000 | $20,000 | $15,000 |
| 2 | $9,000 | $12,000 | $12,000 |
| 3 | $9,000 | $7,200 | $9,000 |
| 4 | $9,000 | $4,320 | $6,000 |
| 5 | $9,000 | $1,480 | $3,000 |
| Total | $45,000 | $45,000 | $45,000 |
- Straight-line — $45,000 ÷ 5 = $9,000 a year.
- Double-declining balance (DDB) — twice the straight-line rate (2 × 20% = 40%) applied to the carrying amount, ignoring salvage in the rate: $50,000 × 40% = $20,000; $30,000 × 40% = $12,000; $18,000 × 40% = $7,200; $10,800 × 40% = $4,320. Year 5 is limited to $1,480 so the carrying amount stops at the $5,000 salvage value.
- Sum-of-the-years'-digits (SYD) — the digits 1 to 5 sum to 15; year 1 is 5/15 of $45,000 = $15,000, year 2 is 4/15 = $12,000, and so on.
- Units of production — $45,000 ÷ 100,000 units = $0.45 per unit. If the machine produces 22,000 units this year, depreciation is $9,900.
Book vs tax depreciation
US tax depreciation uses the Modified Accelerated Cost Recovery System (MACRS), which sets recovery periods and conventions by law and ignores salvage value. Because book and tax depreciation differ, the asset's tax basis and book carrying amount differ — creating deferred taxes (see our FAR income taxes notes). IRS Publication 946 covers the tax rules.
Changing method or estimate
- A change in useful life or salvage value is a change in estimate — spread the remaining carrying amount over the remaining life. No restatement.
- A change in depreciation method is a change in estimate effected by a change in accounting principle — also applied prospectively, and it must be justified as preferable.
Practice MCQs
1. An asset costing $40,000 with a $4,000 salvage value and a 4-year life is depreciated by double-declining balance. What is year 2 depreciation?
(A) $9,000 (B) $10,000 (C) $18,000 (D) $20,000
Answer: B. Rate 50%. Year 1: $20,000, leaving $20,000. Year 2: $20,000 × 50% = $10,000.
2. After 3 years of straight-line depreciation on the $50,000 machine above, the company revises the remaining life to 4 more years with the same salvage value. What is the new annual depreciation?
(A) $9,000 (B) $5,750 (C) $4,500 (D) $6,750
Answer: C. Carrying amount after 3 years = $50,000 − (3 × $9,000) = $23,000. New annual depreciation = ($23,000 − $5,000) ÷ 4 = $4,500. A change in estimate is applied prospectively — no restatement.
Full coverage is in our FAR property, plant and equipment notes and, for tax, REG basis and cost recovery.