*The Straight Line Rate is the percentage of the cost depreciated each year evenly.
*The Implied Rate is the precise compound annual rate required to reduce the asset value to the salvage value over the useful life (used in Declining Balance methods).
function calculateDepreciation() {
// Get input values
var cost = parseFloat(document.getElementById('assetCost').value);
var salvage = parseFloat(document.getElementById('salvageValue').value);
var life = parseFloat(document.getElementById('usefulLife').value);
var resultDiv = document.getElementById('resultOutput');
// Validation
if (isNaN(cost) || isNaN(salvage) || isNaN(life)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (life = cost) {
alert("Salvage value cannot be greater than or equal to the asset cost.");
return;
}
if (cost < 0 || salvage < 0) {
alert("Values cannot be negative.");
return;
}
// Calculation 1: Straight Line Method
var depreciableAmount = cost – salvage;
var annualStraightLineAmount = depreciableAmount / life;
// Straight line rate is often expressed as (1/Life) or (AnnualDepreciation / DepreciableAmount)
// Here we show it as a percentage of the total depreciable base per year (1/n)
var straightLineRate = (1 / life) * 100;
// Calculation 2: Implied Rate (Diminishing Value Formula)
// Formula: Rate = 1 – (Salvage / Cost)^(1/n)
var ratio = salvage / cost;
var power = 1 / life;
var diminishingRateDecimal = 1 – Math.pow(ratio, power);
var diminishingRatePercent = diminishingRateDecimal * 100;
// Display Results
document.getElementById('resStraightLineRate').innerText = straightLineRate.toFixed(2) + "%";
document.getElementById('resStraightLineAmt').innerText = formatCurrency(annualStraightLineAmount);
document.getElementById('resDiminishingRate').innerText = diminishingRatePercent.toFixed(2) + "%";
document.getElementById('resBaseAmount').innerText = formatCurrency(depreciableAmount);
// Show result box
resultDiv.style.display = "block";
}
function formatCurrency(num) {
return num.toLocaleString('en-US', { style: 'currency', currency: 'USD' });
}
Understanding how to calculate the rate of depreciation formula is essential for business owners, accountants, and asset managers. Depreciation represents how much of an asset's value has been used up over time. By calculating this rate accurately, businesses can properly allocate costs, determine tax deductions, and plan for future asset replacements.
What is the Rate of Depreciation?
The rate of depreciation is the percentage at which an asset loses value each year. While the depreciation amount is a currency value (e.g., $1,000 per year), the rate is expressed as a percentage (e.g., 10% per year). The formula you choose depends heavily on the accounting method you prefer: Straight Line or Diminishing (Declining) Balance.
Method 1: Straight Line Depreciation Formula
The Straight Line method is the simplest and most common way to calculate depreciation. It assumes the asset loses value evenly over its useful life.
Suppose you buy a machine for $10,000. You expect it to last for 5 years and have a scrap (salvage) value of $1,000.
Depreciable Base: $10,000 – $1,000 = $9,000
Annual Amount: $9,000 / 5 = $1,800 per year
Rate: (1 / 5) × 100 = 20%
Method 2: Diminishing Value (Implied Rate) Formula
The Diminishing Value method (also known as Reducing Balance) assumes an asset loses more value in the early years of its life. To find the exact rate that reduces the asset from its Cost to its Salvage Value over precisely $N$ years, we use the following mathematical formula:
Rate = 1 – (Salvage Value / Cost)(1 / n) Where "n" is the useful life in years.
Real-World Calculation
Let's use the calculator above's logic for a vehicle.
Initial Cost: $25,000
Salvage Value: $5,000
Useful Life: 8 years
Using the formula Rate = 1 - (5000 / 25000)^(1/8):
Divide Salvage by Cost: 5,000 / 25,000 = 0.2
Calculate the exponent: 1 / 8 = 0.125
Raise 0.2 to the power of 0.125 ≈ 0.818
Subtract from 1: 1 – 0.818 = 0.182
Result: The depreciation rate is roughly 18.2% per year.
Why Does the Formula Matter?
Choosing the correct formula impacts your financial statements:
Tax Implications: Accelerating depreciation (higher rates early on) can reduce taxable income in the short term.
Asset Valuation: Accurate rates ensure your balance sheet reflects the true market value of your equipment.
Replacement Planning: Knowing the rate helps forecast when an asset will reach its end-of-life value.
Key Terms Definitions
Initial Asset Cost:
The total purchase price of the asset, including shipping, installation, and taxes.
Salvage Value:
The estimated resale value of the asset at the end of its useful life.
Useful Life:
The estimated number of years the asset will be profitable or useful to the business.