Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. It represents how much of an asset's value has been "used up" over time.
Why is Depreciation Important?
Accurate Financial Reporting: Depreciation ensures that an asset's cost is matched with the revenues it helps generate, leading to a more accurate picture of profitability.
Tax Benefits: Depreciation expenses can reduce a company's taxable income, lowering its tax liability.
Asset Valuation: It provides a more realistic book value for assets on the balance sheet.
Common Depreciation Methods
This calculator supports three common depreciation methods:
1. Straight-Line Depreciation
This is the simplest and most common method. It spreads the cost of the asset evenly over its useful life.
Formula:
Annual Depreciation = (Cost of Asset - Salvage Value) / Useful Life
Example: An asset costing $10,000 with a salvage value of $1,000 and a useful life of 5 years would have an annual depreciation of:
This is an accelerated depreciation method, meaning it records larger expenses during the earlier years of an asset's life. It's calculated by multiplying the depreciable cost (Cost – Salvage Value) by a fraction.
Steps:
Calculate the sum of the years of the asset's useful life. For a 5-year life, this is 5 + 4 + 3 + 2 + 1 = 15. (A shortcut formula is n*(n+1)/2, where n is the useful life.)
The depreciation fraction for each year is: (Remaining Useful Life) / (Sum of Years' Digits).
Annual Depreciation = (Cost of Asset - Salvage Value) * (Remaining Useful Life / Sum of Years' Digits)
Example: For the $10,000 asset with $1,000 salvage value and 5 years' life (Sum of Years = 15):
Note: This calculator shows the depreciation for Year 1.
3. Double Declining Balance (DDB) Depreciation
This is another accelerated method that depreciates assets at double the rate of the straight-line method. It does not consider the salvage value initially but ensures the book value doesn't fall below it.
Formula:
Annual Depreciation = (Book Value at Beginning of Year) * (2 / Useful Life)
Note: The book value at the beginning of the first year is the initial cost of the asset. In subsequent years, it's the initial cost minus accumulated depreciation. The depreciation expense is limited to the amount that brings the book value down to the salvage value.
Example: For the $10,000 asset with $1,000 salvage value and 5 years' life:
Year 5: ($10,000 – $4,000 – $2,400 – $1,440 – $864) = $1,296 book value. Since this is less than the $1,000 salvage value, the depreciation for year 5 would be $296 ($1,296 – $1,000).
Note: This calculator shows the depreciation for Year 1.
function calculateDepreciation() {
var assetCost = parseFloat(document.getElementById("assetCost").value);
var salvageValue = parseFloat(document.getElementById("salvageValue").value);
var usefulLife = parseInt(document.getElementById("usefulLife").value);
var method = document.getElementById("depreciationMethod").value;
var resultValue = document.getElementById("result-value");
var resultUnits = document.getElementById("result-units");
resultValue.textContent = "–";
resultUnits.textContent = "";
// Input validation
if (isNaN(assetCost) || assetCost <= 0) {
alert("Please enter a valid Initial Cost of Asset.");
return;
}
if (isNaN(salvageValue) || salvageValue < 0) {
alert("Please enter a valid Salvage Value.");
return;
}
if (isNaN(usefulLife) || usefulLife = assetCost) {
alert("Salvage Value cannot be greater than or equal to the Initial Cost of Asset.");
return;
}
var annualDepreciation = 0;
var depreciableCost = assetCost – salvageValue;
if (method === "straight-line") {
annualDepreciation = depreciableCost / usefulLife;
} else if (method === "sum-of-years-digits") {
var sumOfYears = (usefulLife * (usefulLife + 1)) / 2;
// For SOYD, we calculate for Year 1 by convention in a simple calculator
var remainingUsefulLife = usefulLife;
annualDepreciation = depreciableCost * (remainingUsefulLife / sumOfYears);
} else if (method === "double-declining-balance") {
var depreciationRate = 2 / usefulLife;
annualDepreciation = assetCost * depreciationRate;
// DDB adjustment for salvage value is typically handled over the years,
// but for a single year calculation (usually Year 1), we use the initial cost.
// We also need to ensure it doesn't exceed depreciable cost in total.
if (annualDepreciation > depreciableCost) {
annualDepreciation = depreciableCost; // Cap at the total depreciable amount if rate is very high
}
}
// Final check to ensure book value doesn't go below salvage value in Year 1 calculation
if (assetCost – annualDepreciation depreciableCost) {
annualDepreciation = depreciableCost;
}
}
resultValue.textContent = annualDepreciation.toFixed(2);
resultUnits.textContent = "per year";
}