Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It represents how much of an asset's value has been used up. Businesses use depreciation for both tax purposes and to accurately reflect the value of their equipment, vehicles, and machinery on balance sheets.
Common Methods of Depreciation
1. Straight-Line Method: This is the simplest and most common method. It assumes the asset loses the same amount of value every year. The formula is: (Cost – Salvage Value) / Useful Life.
2. Double Declining Balance (DDB): An accelerated depreciation method that results in higher depreciation expenses in the early years of an asset's life. It is calculated as: 2 × Straight-Line Rate × Book Value.
Realistic Example: Straight-Line
Imagine a business purchases a delivery van for $35,000. They expect to sell it for scrap for $5,000 after 5 years of use.
Asset Cost: $35,000
Salvage Value: $5,000
Depreciable Base: $30,000 ($35,000 – $5,000)
Annual Depreciation: $6,000 ($30,000 / 5 years)
Why Salvage Value Matters
The salvage value (or residual value) is the estimated amount an owner will receive when they dispose of the asset at the end of its useful life. Subtracting this from the original cost gives you the "depreciable base," ensuring you don't depreciate the asset below its remaining scrap value.
function calculateDepreciation() {
var cost = parseFloat(document.getElementById('assetCost').value);
var salvage = parseFloat(document.getElementById('salvageValue').value);
var life = parseFloat(document.getElementById('usefulLife').value);
var method = document.getElementById('depMethod').value;
if (isNaN(cost) || isNaN(salvage) || isNaN(life) || life cost) {
alert("Salvage value cannot be higher than the asset cost.");
return;
}
var annualDep = 0;
var depreciableBase = cost – salvage;
if (method === 'straight') {
annualDep = depreciableBase / life;
} else if (method === 'ddb') {
var rate = (1 / life) * 2;
annualDep = cost * rate;
// Ensure year 1 doesn't exceed total depreciable amount
if (annualDep > depreciableBase) {
annualDep = depreciableBase;
}
}
var monthlyDep = annualDep / 12;
document.getElementById('annualResult').innerText = '$' + annualDep.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('baseResult').innerText = '$' + depreciableBase.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('monthlyResult').innerText = '$' + monthlyDep.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('results').style.display = 'block';
}