Last updated: March 2025
Quick Answer
Straight-line depreciation spreads the cost of an asset evenly across its useful life. To calculate it, subtract the asset's salvage value from its purchase cost, and divide that number by the asset's useful life in years.
Key Takeaways
- ✓ Non-Cash Expense: Depreciation reduces your business's taxable net income, but no cash actually leaves your bank account when you record the expense. The cash left your account when you originally bought the asset.
- ✓ Salvage Value: Also known as residual value or scrap value, this is what you expect to sell the asset for at the end of its useful life. Many businesses set this to $0 for simplicity.
- ✓ Tax vs Book Depreciation: Tax authorities (like the IRS) often have specific schedules and methods (like MACRS or Section 179) you must use for your tax returns, which may differ from the straight-line calculations you use in your internal books.
How to Choose a Depreciation Method
Accounting standards generally allow you to choose a depreciation method that best reflects how the asset's economic benefits are consumed.
Use Straight-Line when: The asset's usefulness degrades steadily over time. If you buy a heavy-duty drill press, it provides roughly the same value to the business in year 1 as it does in year 5. Straight-line is the simplest method and requires the least accounting effort.
Use Declining Balance when: The asset quickly becomes obsolete. If you buy a high-end laptop for a software developer, it will be incredibly fast and useful in year 1, but by year 5, it will likely be too slow to run modern applications. The declining balance method lets you write off a larger chunk of the expense in the early years.
Frequently Asked Questions
What is straight-line depreciation?
Straight-line depreciation is the simplest and most common method used by businesses. It assumes that an asset loses an equal amount of its value every single year of its useful life until it reaches its salvage value.
What is declining balance depreciation?
The declining balance method (or double-declining balance) is an accelerated depreciation method. It assumes an asset loses more of its value in the early years of its life. This is commonly used for assets that become obsolete quickly, like computers and technology.
What is salvage value?
Salvage value (or residual value) is the estimated amount you expect to be able to sell the asset for at the very end of its useful life.
Why do businesses record depreciation?
Depreciation is a non-cash expense that reduces a company’s taxable income without actually costing them cash in that specific year (since the cash was spent when the asset was purchased). It matches the cost of the asset to the years it is used to generate revenue.