Quick answer: How do you calculate depreciation?
To calculate depreciation, take three numbers — the asset's cost, its salvage value (what it's worth at the end), and its useful life in years — and spread the difference across those years. The simplest method, straight-line, is (cost − salvage value) ÷ useful life. A $30,000 van with a $5,000 salvage value over 5 years depreciates $5,000 a year. Three other methods (declining balance, sum-of-the-years-digits, and units of production) front-load or usage-match the expense. BizBooks Pro records the resulting depreciation entry to a GAAP-compliant contra-asset account so your balance sheet always shows each asset's true book value.
You bought a $30,000 delivery van in January. Do you take a $30,000 hit to profit this year? No — and understanding why is the whole point of depreciation. That van will earn money for five years, so accounting spreads its cost across those five years to match the expense to the income it helps produce. Learning how to calculate depreciation is really about learning to tell the truth on your financial statements: a business that expensed the entire van in year one would look like it lost money this year and made a killing for the next four, when neither is true.
This guide walks through the three inputs every calculation needs, the four depreciation methods small businesses actually use — each with a worked example — and how the finished number lands in your books as a journal entry. No accounting degree required.
The Three Numbers Behind Every Depreciation Method
Before you pick a method, you need three inputs. Every formula below is just a different way of dividing these up.
- Cost (or cost basis). What you paid to buy the asset and get it working — the purchase price plus delivery, installation, and setup. A machine that cost $48,000 plus $2,000 to install has a cost basis of $50,000.
- Salvage value (or residual value). What you expect the asset to be worth at the end of its useful life — the trade-in or scrap value. It's an estimate; many small businesses set it to $0 for simplicity, which is fine as long as it's honest.
- Useful life. How many years (or units of output) the asset will serve the business. A laptop might be 3 years; furniture 7; a delivery van 5. Industry norms and IRS class lives are common reference points.
The depreciable base — the amount you'll actually spread out — is cost minus salvage value. For our van: $30,000 − $5,000 = $25,000. That $25,000 is what gets divided up. The remaining $5,000 stays on the books as the van's floor value.
One asset, one method, all the way through. Pick a method when you put the asset into service and stick with it for that asset's whole life. Consistency is a core accounting principle and keeps your statements comparable year to year — it also aligns with GAAP for small business.
Method 1: Straight-Line Depreciation (The Default)
Straight-line spreads the cost evenly — the same expense every year. It's the easiest to calculate, the easiest to explain to a banker, and the right choice for most assets that lose value steadily with age rather than with heavy early use.
The formula:
Annual depreciation = (Cost − Salvage value) ÷ Useful life
For the $30,000 van with a $5,000 salvage value and 5-year life: ($30,000 − $5,000) ÷ 5 = $5,000 per year. Here's the full schedule:
| Year | Depreciation expense | Accumulated depreciation | Book value (end of year) |
|---|---|---|---|
| Start | — | — | $30,000 |
| 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 |
Notice the book value never drops below the $5,000 salvage value — that's the point where depreciation stops. If you sell the van for more or less than $5,000 at that point, the difference becomes a gain or loss on the sale.
Method 2: Declining Balance (Front-Loaded)
Declining balance expenses more in the early years and less later. It suits assets that lose value fast when new — computers, vehicles, and technology that's worth noticeably less the moment it's a year old. The most common version is double-declining balance, which uses twice the straight-line rate.
Straight-line over 5 years is 20% a year, so double-declining is 40%. Crucially, you apply that rate to the asset's book value each year — not the depreciable base — and you ignore salvage value until the end:
| Year | Book value (start) | Depreciation (40%) | Book value (end) |
|---|---|---|---|
| 1 | $30,000 | $12,000 | $18,000 |
| 2 | $18,000 | $7,200 | $10,800 |
| 3 | $10,800 | $4,320 | $6,480 |
| 4 | $6,480 | $1,480* | $5,000 |
| 5 | $5,000 | $0 | $5,000 |
*In year 4, a full 40% ($2,592) would push book value below the $5,000 salvage floor, so you only take enough ($1,480) to land exactly on it. Compare year 1 here — $12,000 — against straight-line's $5,000: same total over the asset's life, very different timing.
Method 3: Sum-of-the-Years'-Digits (Gently Accelerated)
Sum-of-the-years'-digits (SYD) is a milder acceleration than declining balance. You add up the digits of the useful life to get a denominator, then apply a shrinking fraction to the depreciable base each year.
For a 5-year life: 5 + 4 + 3 + 2 + 1 = 15. Year 1 uses 5/15, year 2 uses 4/15, and so on, always multiplied by the $25,000 depreciable base:
| Year | Fraction | Depreciation | Book value (end) |
|---|---|---|---|
| 1 | 5/15 | $8,333 | $21,667 |
| 2 | 4/15 | $6,667 | $15,000 |
| 3 | 3/15 | $5,000 | $10,000 |
| 4 | 2/15 | $3,333 | $6,667 |
| 5 | 1/15 | $1,667 | $5,000 |
SYD front-loads the expense like declining balance but tapers more smoothly and lands cleanly on salvage value without the year-end adjustment trick. It's less common in practice but shows up in industries where an asset's productivity fades gradually.
Method 4: Units of Production (Usage-Based)
Units of production ties depreciation to actual use, not the calendar. It's ideal for assets whose wear depends on output — a delivery van measured in miles, a printing press in impressions, a machine in operating hours. A van driven hard racks up depreciation faster than one that barely leaves the lot.
First find the rate per unit:
Rate per unit = (Cost − Salvage value) ÷ Total estimated units
Say the van is expected to last 100,000 miles. Rate = $25,000 ÷ 100,000 = $0.25 per mile. If it drives 22,000 miles in year one, depreciation is 22,000 × $0.25 = $5,500. Drive only 12,000 miles the next year and it's just $3,000. The expense rises and falls with how hard the asset actually works — which is exactly why manufacturers and fleet operators like it.
Which Depreciation Method Should You Use?
For most small businesses, straight-line is the right answer for book purposes — it's simple, predictable, and lenders understand it instantly. Reach for the others only when they genuinely reflect how an asset loses value.
| Method | Expense pattern | Best for |
|---|---|---|
| Straight-line | Even every year | Most assets; the sensible default |
| Double-declining balance | Heavy early, light late | Tech, vehicles that lose value fast |
| Sum-of-years'-digits | Front-loaded, smooth taper | Assets whose output fades gradually |
| Units of production | Tracks actual usage | Machinery, fleets billed by output |
Recording Depreciation: The Journal Entry
Calculating the number is only half the job — you still have to put it in the books. Depreciation is recorded with a simple two-line double-entry: you debit Depreciation Expense (which lowers profit on your income statement) and credit Accumulated Depreciation (a contra-asset that reduces the asset's value on your balance sheet).
For the straight-line van, the monthly entry is $5,000 ÷ 12 = about $417:
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | $417 | |
| Accumulated Depreciation — Vehicles | $417 |
Note what doesn't move: the van's original $30,000 cost stays untouched in the Fixed Assets section of your balance sheet. Accumulated depreciation simply grows alongside it, and the difference between the two — the net book value — is what the asset is worth on paper today. This is a classic month-end close entry: post it every month and each period's profit reflects the true cost of using your equipment.
Set up the accounts first. You'll want a fixed-asset account (e.g. 1500 Vehicles) and a matching accumulated-depreciation account (1510) in your chart of accounts. BizBooks Pro's default chart already includes fixed-asset and accumulated-depreciation accounts, so the entry above posts cleanly with no setup.
Book Depreciation vs. Tax Depreciation
Here's the wrinkle that trips up most owners: the depreciation on your financial statements and the depreciation on your tax return are often different numbers. That's normal and expected.
Book depreciation is what you record in your accounting system to keep your statements accurate — usually straight-line, as above. Tax depreciation follows IRS rules. In the U.S. that means MACRS (the Modified Accelerated Cost Recovery System), and it's often turbo-charged by Section 179 expensing or bonus depreciation, which can let you write off much or all of an asset's cost in the year you buy it.
So the same van might depreciate $5,000 on your books but be largely written off on your tax return in year one. Don't try to force your books to match the tax return — keep clean, honest book records using the methods above, and let your tax preparer apply the tax rules at filing time. Your accounting system's job is an accurate picture of the business; your tax return's job is minimizing tax within the law. They're allowed to disagree.
Depreciation That Posts to the Right Accounts
BizBooks Pro is GAAP-compliant double-entry accounting that runs on your own computer. Its default chart of accounts includes fixed-asset and accumulated-depreciation accounts, so recording depreciation is a clean two-line entry that flows straight to your balance sheet and P&L — with book value always up to date. One flat annual price, no monthly fees.
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Depreciation isn't accounting busywork — it's how your books tell the truth about assets that earn money over many years. Learn the three inputs (cost, salvage value, useful life), pick the method that matches how the asset actually loses value (straight-line for most, an accelerated method for fast-fading tech, units of production for usage-driven machinery), and record the expense as a monthly journal entry against accumulated depreciation. Do that, and every balance sheet you hand a lender shows what your equipment is really worth — and every month's profit reflects the real cost of running the business.
Want the underlying mechanics to click? Our free interactive double-entry accounting course lets you practice journal entries, including depreciation, in a hands-on sandbox at your own pace.
Frequently Asked Questions
How do you calculate depreciation for a small business?
Start with three numbers: the asset's cost, its salvage value (what it will be worth at the end), and its useful life in years. The simplest method, straight-line, subtracts salvage value from cost to get the depreciable base, then divides by useful life. A $30,000 van with a $5,000 salvage value and a 5-year life depreciates ($30,000 − $5,000) ÷ 5 = $5,000 per year. Other methods (declining balance, sum-of-the-years'-digits, units of production) front-load or usage-match the expense, but all start from those same three inputs.
What is the easiest depreciation method?
Straight-line is the easiest and by far the most common for small business book accounting. You expense the same amount every year of the asset's life, which is simple to calculate, simple to explain to a lender, and produces smooth, predictable financial statements. Unless an asset genuinely loses value faster early on or wears out by usage rather than time, straight-line is the sensible default.
What is the difference between book depreciation and tax depreciation?
Book depreciation is what you record in your accounting system to keep your financial statements accurate — usually straight-line. Tax depreciation is what you claim on your tax return, and in the U.S. it follows IRS rules (MACRS), often accelerated by Section 179 expensing or bonus depreciation. The two numbers can differ for the same asset in the same year. Keep clean book records and let your tax preparer apply the tax rules; don't try to force your books to match the tax return.
What is accumulated depreciation?
Accumulated depreciation is the running total of all the depreciation expense you've recorded on an asset since you bought it. It's a contra-asset account that sits under the asset on your balance sheet and reduces it. If a $30,000 van has $10,000 of accumulated depreciation, its book value (or net book value) is $20,000. The asset's original cost never changes; accumulated depreciation grows each period until the asset is fully depreciated.
Do you record depreciation monthly or annually?
Either works, but monthly is better for accrual-basis books because it spreads the expense evenly and keeps every month's profit and loss statement accurate. Take the annual depreciation figure and divide by twelve, then post that amount as part of your month-end close. Recording it once a year is simpler but makes eleven months look artificially profitable and the twelfth look artificially expensive.
What assets can you depreciate?
You depreciate tangible assets you own and use in the business that last more than one year and wear out over time — vehicles, machinery, computers, furniture, and equipment. You do not depreciate land (it doesn't wear out), inventory (it's expensed when sold), or things you use up within a year (those are ordinary expenses). Intangible assets like patents are "amortized" rather than depreciated, but the math is the same idea.
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