Question 1

What is depreciation?

Accepted Answer

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It recognizes that assets like equipment, vehicles, and buildings lose value over time due to wear and tear, obsolescence, or age.

Question 2

Which depreciation method should I use?

Accepted Answer

The choice depends on your objectives:

• Straight-Line: Best for financial reporting, provides consistent expenses
• Declining Balance: Tax optimization, matches higher usage in early years
• Sum-of-Years-Digits: Similar to declining balance, accelerated depreciation
• Units of Production: Best when asset usage varies significantly year to year

Many companies use one method for financial reporting (usually straight-line) and another for tax purposes (accelerated methods).

Question 3

What is salvage value?

Accepted Answer

Salvage value (also called residual value) is the estimated value of an asset at the end of its useful life. It's the amount you expect to receive when you dispose of or sell the asset. The depreciable base is calculated as: Asset Cost - Salvage Value.

Question 4

How do I determine useful life?

Accepted Answer

Useful life is typically determined by:

• IRS guidelines and MACRS depreciation tables (for tax purposes)
• Industry standards and manufacturer specifications
• Company's historical experience with similar assets
• Expected physical wear and tear
• Technological obsolescence

Common useful lives: Computers (3-5 years), Vehicles (5 years), Machinery (7-10 years), Buildings (27.5-39 years).

Question 5

What is double declining balance?

Accepted Answer

Double declining balance (DDB) is an accelerated depreciation method where the depreciation rate is double the straight-line rate. For example, an asset with a 10-year life has a straight-line rate of 10% per year, so the DDB rate is 20% per year. This method depreciates assets faster in early years.

Question 6

Can I change depreciation methods?

Accepted Answer

Generally, once you choose a depreciation method for an asset, you should use it consistently throughout the asset's life for financial reporting purposes. Changing methods requires justification and disclosure in financial statements. However, you can use different methods for financial reporting versus tax purposes.

Question 7

How does depreciation affect financial statements?

Accepted Answer

Depreciation impacts:

• Income Statement: Reduces net income through depreciation expense
• Balance Sheet: Reduces asset value through accumulated depreciation
• Cash Flow Statement: Added back to net income in operating activities (non-cash expense)
• Tax Return: Reduces taxable income (tax shield benefit)

Question 8

What is accumulated depreciation?

Accepted Answer

Accumulated depreciation is the total amount of depreciation expense recorded for an asset since it was acquired. It's a contra-asset account on the balance sheet. Book Value = Asset Cost - Accumulated Depreciation.

Year	Depreciation Expense	Accumulated	Book Value
1	$18,000	$18,000	$82,000
2	$18,000	$36,000	$64,000
3	$18,000	$54,000	$46,000
4	$18,000	$72,000	$28,000
5	$18,000	$90,000	$10,000

Depreciation Calculator

Asset Information

Depreciation Method

Depreciation Summary

Depreciation Schedule

How the Depreciation Calculator Works

Straight-Line Depreciation

Declining Balance Depreciation

Sum-of-Years-Digits

Units of Production

Frequently Asked Questions

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