Depreciation calculator

How do you calculate depreciation?

Depreciation spreads the cost of an asset, less what you expect to get back for it at the end, over the years you use it. Every method starts from the same three facts: the cost, the residual value (also called scrap or salvage value) and the useful life. The difference between cost and residual value is the depreciable amount, and the methods differ only in how they share it out between the years.

Here is one asset run through every tab of the calculator: a machine costing $20,000 with a $2,000 residual value and a five-year life, so $18,000 to depreciate.

Straight-line charges the same each year. The reducing balance, double-declining and sum-of-digits methods charge more early and less later, which suits assets such as vehicles and computers that lose value fastest when new. Units of production follows how hard the asset actually worked. MACRS ignores the residual value altogether and follows a table set by the IRS.

What is the straight-line depreciation formula?

Annual depreciation = (cost - residual value) / useful life. For the machine above, ($20,000 - $2,000) / 5 = $3,600 a year, which is 18% of the cost each year. After five years accumulated depreciation is $18,000 and the carrying amount equals the residual value.

Exam questions often add a part year. Suppose the machine was bought on 1 April, the year ends on 31 December, and the policy is to charge depreciation monthly from the date of purchase. Lay the answer out in three lines:

• Annual charge: ($20,000 - $2,000) / 5 = $3,600.
• Year 1 charge: $3,600 x 9/12 = $2,700, so the carrying amount at the first year end is $17,300.
• Years 2 to 5: $3,600 each; year 6 takes the remaining 3/12, which is $900.

Set Months owned in the first year to 9 and the schedule shows exactly this, six financial years that add up to five years of use. If the policy is instead a full year's charge in the year of purchase and none in the year of sale, leave the field at 12. Straight-line suits assets whose benefit is used up evenly, such as buildings and furniture, and the charge it produces feeds the financial statements covered in ACCA Financial Accounting.

How does the reducing balance (diminishing value) method work?

The reducing balance method, called diminishing value in Australia and New Zealand, charges a fixed percentage of the carrying amount at the start of each year. Because the carrying amount falls each year, so does the charge. The residual value is not in the formula, but the rate is usually chosen so the asset ends close to it.

Worked example in pounds: a delivery van costs £30,000, has a residual value of £6,000 after four years, and is depreciated at 25% a year on the reducing balance.

After four years the van is carried at £9,492.19, which is £3,492.19 above its residual value. If it is then sold for £6,000, that difference is recorded as a loss on disposal. Straight-line on the same van would charge £6,000 every year and land exactly on £6,000.

To find the rate that reaches the residual value exactly, use rate = 1 - (residual value / cost)^(1 / life). For the van that is 1 - (6,000 / 30,000)^(1/4) = 33.13%; for the $20,000 machine with a $2,000 residual over five years it is 36.90%. The calculator shows this figure under every reducing balance result.

Double-declining balance and the switch to straight-line

Double-declining balance is a reducing balance method with the rate fixed at twice the straight-line rate: 2 / useful life. A five-year asset is depreciated at 40% a year, a three-year asset at 66.67%. Spreadsheets build it in as the DDB function.

Left alone, a declining rate never reaches the residual value exactly, so the usual rule is to switch to straight-line on whatever remains as soon as that gives a larger charge. Each year the calculator compares rate x carrying amount with (carrying amount - residual value) / years left, takes the larger, and never goes below the residual value.

• $10,000 asset, no residual, five years. The charges are $4,000, $2,400 and $1,440. In year 4 the declining charge would be 40% x $2,160 = $864, but straight-line on the $2,160 left over two years is $1,080, so the schedule switches and charges $1,080 in years 4 and 5.
• The $20,000 machine with a $2,000 residual. The charges are $8,000, $4,800, $2,880 and $1,728. Year 5 is limited to $592, the amount that brings it down to $2,000, so no switch is needed.
• A €1,500 laptop over three years with no residual. Year 1 is €1,000 and year 2 €333.33. In year 3 the declining charge would be €111.11, but straight-line on the €166.67 left is €166.67, so the schedule switches. Straight-line would charge €500 a year.

Sum of the years' digits and units of production

Sum of the years' digits is another accelerated method. Add the years of life together, 1 + 2 + 3 + 4 + 5 = 15 for a five-year asset (or use n(n + 1) / 2), then charge the depreciable amount in fractions that count down: 5/15 in year 1, 4/15 in year 2, and so on to 1/15. For the $20,000 machine that gives $6,000, $4,800, $3,600, $2,400 and $1,200, exactly $18,000 in total.

Units of production ties the charge to use rather than time. Work out a rate per unit, then multiply by the units used each year:

• Rate per unit: ($20,000 - $2,000) / 100,000 units = $0.18 a unit.
• Year 1, 30,000 units: 30,000 x $0.18 = $5,400.
• Year 2, 25,000 units: $4,500; then $3,600, $2,700 and $1,800 for 20,000, 15,000 and 10,000 units.

The unit can be machine hours, miles driven or items produced. Enter one row per year in the Units of production tab. If the rows add up to more than the expected total, the charge stops at the residual value; if they add up to less, the calculator tells you how much is still to be depreciated.

How does MACRS depreciation work for US tax?

MACRS, the Modified Accelerated Cost Recovery System, is used to recover the basis of most US business and investment property placed in service after 1986, according to IRS Publication 946. It is a separate system from the accounts: the method, the recovery period and the yearly percentages are set by the IRS. Under the General Depreciation System (GDS), 3-, 5-, 7- and 10-year property uses the 200% declining balance method and 15- and 20-year property the 150% declining balance method, each switching to straight-line, and the IRS percentage tables have that switch built in. Salvage value is not used under MACRS.

The MACRS tab multiplies your basis by the half-year convention percentages in IRS Publication 946 (2025), Appendix A, Table A-1. The half-year convention treats property as placed in service in the middle of the year, so a 5-year asset is recovered over six tax years. The first rows of the table are:

Publication 946 lists automobiles, trucks and office machinery such as copiers as 5-year property, and office furniture and fixtures such as desks and files as 7-year property. So $20,000 of 5-year equipment gives $4,000, $6,400, $3,840, $2,304, $2,304 and $1,152, and $10,000 of office furniture gives $1,429, $2,449, $1,749, $1,249, $893, $892, $893 and $446.

Table A-1 is not the right table in every case. Publication 946 requires the mid-quarter convention instead when more than 40% of the depreciable basis of property placed in service in the year was placed in service in the last three months, and passenger automobiles are subject to annual dollar limits. The calculator shows the table arithmetic only. It is not tax advice; for a return, work from Publication 946 or a tax professional.

Depreciation recapture. When you sell property depreciated under MACRS, Publication 946 explains that any gain is generally recaptured, that is included in income as ordinary income, up to the depreciation allowed or allowable. The rules for figuring it are in IRS Publication 544.

How to calculate depreciation in Excel

Excel has a function for most methods, with arguments in the order cost, salvage, life and, where needed, the period:

• =SLN(20000, 2000, 5) returns 3,600, the straight-line charge.
• =SYD(20000, 2000, 5, 1) returns 6,000, the sum-of-digits charge for year 1.
• =DDB(20000, 2000, 5, 1) returns 8,000. DDB does not switch to straight-line on its own; Microsoft's documentation points to VDB for a schedule that switches when straight-line gives more.
• =DB(20000, 2000, 5, 1) returns 7,380, not 6,000. DB works out its own rate as 1 - (salvage / cost)^(1 / life) and rounds it to three decimals, here 0.369, so it is a reducing balance that aims at the residual value rather than one at a rate you choose.

For a reducing balance at a rate you set, as exam questions do, the simplest formula is the opening value times the rate in each row of a table: =B2*30%, then closing value = opening value - charge. That is the same layout as the schedule under the calculator.

Common depreciation mistakes

• Applying the reducing balance rate to cost every year. The rate applies to the carrying amount at the start of each year. Applying 30% to $20,000 every year is straight-line at 30%, which writes off $6,000 a year.
• Taking the residual value off before a reducing balance calculation. Straight-line and sum of the digits use cost minus residual value; reducing balance and double-declining apply the rate to the full carrying amount.
• Forgetting the part year. If the policy is monthly, an asset bought with nine months of the year left gets 9/12 of a year's charge.
• Depreciating land. IRS Publication 946 puts it plainly: you cannot depreciate the cost of land, because land does not wear out, become obsolete or get used up.
• Charging depreciation below the residual value. Once the carrying amount reaches the residual value, the charge stops.
• Basing depreciation on revenue. The IFRS Foundation records that in May 2014 the IASB amended IAS 16 to prohibit a revenue-based depreciation method.
• Mixing up book and tax depreciation. The figure in the accounts and the figure on a tax return often differ; MACRS is a tax schedule, not an accounting policy.

What this calculator leaves out

It depreciates one asset at a time with the method, life and residual value you enter. It does not revalue assets, test them for impairment, or change the estimate partway through, although in practice a business reviews useful lives and residual values and spreads any change over the remaining years. It does not apply tax rules outside the US MACRS table: the UK, Canada, Australia and other countries give tax relief for assets under their own rules, which differ from the accounts.

In the MACRS tab it leaves out the section 179 deduction, any special depreciation allowance, the mid-quarter and mid-month conventions, the Alternative Depreciation System, business-use percentages and the limits on passenger automobiles, all covered in Publication 946. All tabs work in whatever currency you choose except MACRS, which is a US system and always shows US dollars. Nothing is converted between currencies.

Glossary

Cost: the price of the asset plus the costs of getting it ready for use. Residual value: the amount expected from the asset at the end of its useful life, also called scrap or salvage value. Useful life: the period over which the asset is expected to be used. Depreciable amount: cost less residual value. Carrying amount: cost less accumulated depreciation, also called net book value or written-down value. Accumulated depreciation: all depreciation charged so far. Loss or gain on disposal: the difference between the sale proceeds and the carrying amount when the asset is sold. Basis: the US tax term for the amount being recovered, usually the cost. Recovery period: the MACRS class life in years. Half-year convention: the MACRS assumption that property is placed in service in the middle of the year.

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