Definition
Depreciation is the systematic allocation of the depreciable amount of a tangible fixed asset (its cost minus residual value) over its useful life. Each period's charge is recorded as an expense and credited to accumulated depreciation, so the asset's carrying amount falls while the cost stays visible in the books.
How it works
The method should reflect how the asset's benefits are used up. Straight-line spreads the cost evenly and suits buildings and furniture. Declining balance charges more in early years and suits vehicles and technology. Units of production follows actual usage, such as machine hours. Land is not depreciated.
Depreciation is a non-cash expense: the cash left when the asset was bought. That is why it is added back in the indirect cash flow statement. Tax rules often prescribe their own rates, which may differ from the accounting depreciation. Build a full schedule with the depreciation calculator.
Formula
Straight-line charge = (Cost - Residual value) / Useful life
Declining balance charge = Carrying amount × Rate
Units of production charge = (Cost - Residual value) × Units this period / Total expected units
Example: straight-line depreciation of a van
A delivery van costs 30,000, has a residual value of 5,000 and a useful life of 5 years. The annual charge is (30,000 - 5,000) / 5 = 5,000. Each year the entry debits depreciation expense 5,000 and credits accumulated depreciation 5,000.
| Year | Charge | Accumulated depreciation | Carrying amount |
|---|---|---|---|
| 1 | 5,000 | 5,000 | 25,000 |
| 2 | 5,000 | 10,000 | 20,000 |
| 3 | 5,000 | 15,000 | 15,000 |
| 4 | 5,000 | 20,000 | 10,000 |
| 5 | 5,000 | 25,000 | 5,000 |