11/14/21, 4:03 PM What Are the Different Ways to Calculate Depreciation?

What Are the Different Ways to Calculate

Depreciation?

By  THE INVESTOPEDIA TEAM  Updated April 16, 2021

Reviewed by  SOMER ANDERSON

What Are the Different Methods for Calculating Depreciation?

Depreciation methodically accounts for decreases in the value of a company’s assets over time. In
the United States, accountants must adhere to generally accepted accounting principles(GAAP) in
calculating and reporting depreciation on financial statements. GAAP is a set of rules that includes
the details, complexities, and legalities of business and corporate accounting. GAAP guidelines
highlight several separate allowable methods of depreciation that accounting professionals may
use. 1 

https://www.investopedia.com/ask/answers/021815/what-are-different-ways-calculate-depreciation.asp 1/6
11/14/21, 4:03 PM What Are the Different Ways to Calculate Depreciation?

KEY TAKEAWAYS:
Depreciation accounts for decreases in the value of a company’s assets over time.
Accountants must adhere to generally accepted accounting principles (GAAP) for
depreciation.
There are four methods for depreciation allowable under GAAP, including straight line,
declining balance, sum-of-the-years' digits, and units of production.

How the Different Methods of Depreciation Work

There are four methods for depreciation: straight line, declining balance, sum-of-the-years' digits,
and units of production.

https://www.investopedia.com/ask/answers/021815/what-are-different-ways-calculate-depreciation.asp 2/6
11/14/21, 4:03 PM What Are the Different Ways to Calculate Depreciation?

Straight-Line Depreciation
To use the straight-line method, the asset's useful life (typically in years) and the salvage
value(scrap value) at the end of its life must be estimated. The salvage value is then subtracted
from the original cost. The amount remaining, the depreciable cost, is the total amount of
depreciation that must be expensed in equal amounts over the asset's estimated useful life."

Declining Balance Depreciation

The declining balance method is a type of accelerated depreciation used to write off depreciation
costs more quickly and minimize tax exposure. With the declining balance method, fixed assets
depreciate at an accelerated rate rather than evenly over the asset's estimated useful life.

This method is often used if an asset is expected to have greater utility in its earlier years. This
method also helps to create a larger realized gain when the asset is actually sold. Some
companies may also use the double-declining balance method, which is an even more aggressive
depreciation method for early expense management.

Sum-of-the-Years' Digits Depreciation

The sum-of-the-years' digits method offers a depreciation rate that accelerates more than the
straight-line method but less than the declining balance method. Annual depreciation is separated
https://www.investopedia.com/ask/answers/021815/what-are-different-ways-calculate-depreciation.asp 3/6
11/14/21, 4:03 PM What Are the Different Ways to Calculate Depreciation?

into fractions using the number of years of the business asset's useful life. Such assets may
include buildings, machinery, furniture, equipment, vehicles, and electronics.

Sometimes called the “SYD” method, this approach is also more appropriate than the straight-line
depreciation model if an asset depreciates more quickly or has greater production capacity during
its earlier years.

Units of Production Depreciation

Units of production assigns an equal expense rate to each unit produced, which makes it most
useful for assembly or production lines. The formula involves using historical costs (the price of an
asset based on its nominal or original cost when acquired by the company) and estimated salvage
values. The method then determines the expense for the accounting period multiplied by the
number of units produced.

Special Considerations
Companies have several different options for depreciating the value of an asset over time, in
accordance with GAAP. Most companies use a standard depreciation methodology for all of the
company’s assets. Thus, depreciation methodologies are typically industry-specific.

Compete Risk Free with $100,000 in Virtual Cash

Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of
Investopedia traders and trade your way to the top! Submit trades in a virtual environment before
you start risking your own money. Practice trading strategies so that when you're ready to enter the
real market, you've had the practice you need. Try our Stock Simulator today >>
ARTICLE SOURCES

Related Articles
ACCOUNTING
How Does Proration Affect Asset Depreciation?

SMALL BUSINESS TAXES

What Is the Tax Impact of Calculating Depreciation?

ACCOUNTING

https://www.investopedia.com/ask/answers/021815/what-are-different-ways-calculate-depreciation.asp 4/6
11/14/21, 4:03 PM What Are the Different Ways to Calculate Depreciation?

How Do I Calculate Fixed Asset Depreciation Using Excel?

SMALL BUSINESS TAXES

The Best Method of Calculating Depreciation for Tax Reporting
Purposes

FINANCIAL ANALYSIS
How Does Depreciation Affect Cash Flow?

CORPORATE FINANCE & ACCOUNTING

Understanding Methods and Assumptions of Depreciation

Partner Links

Related Terms
https://www.investopedia.com/ask/answers/021815/what-are-different-ways-calculate-depreciation.asp 5/6
11/14/21, 4:03 PM What Are the Different Ways to Calculate Depreciation?

Straight Line Basis Definition

Straight line basis is the simplest method of calculating depreciation and amortization, the process of
expensing an asset over a specific period.  more

Fully Depreciated Asset

A fully depreciated asset has already expended its full depreciation allowance where only its salvage value
remains.  more

Sum-of-the-Years' Digits
Sum-of-the-years' digits is an accelerated method for calculating an asset's depreciation. Discover more
about it here.  more

Depreciation Definition
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used
to account for declines in value over time.  more

Salvage Value Definition

Salvage value is the estimated book value of an asset after depreciation. It is an important component in the
calculation of a depreciation schedule.  more

Pre-Depreciation Profit
Pre-depreciation profit includes earnings that are calculated prior to non-cash expenses.

https://www.investopedia.com/ask/answers/021815/what-are-different-ways-calculate-depreciation.asp 6/6