How to Calculate Depreciation for Assets: A Practical Guide for Business Owners

Ever bought something big—like a car, computer, or machine—and noticed it’s worth less after a while? That’s depreciation in action!

In business and accounting, knowing how to calculate depreciation is important for tracking how much value your stuff is losing over time.

Let’s break it down in plain English.

💡 What Is Depreciation?

Depreciation is how we spread the cost of an asset (like a car, laptop, or machine) over the number of years it’s expected to last.

Instead of taking one huge expense when you buy it, you “depreciate” it little by little.

🧮 The 4 Most Common Ways to Calculate Depreciation

1. Straight-Line Depreciation (The simplest method)

✅ This one’s the most popular—and easiest!

📘 Formula:

(Asset Cost – Salvage Value) ÷ Useful Life = Annual Depreciation

• Asset cost = what you paid
• Salvage value = what it’ll be worth at the end
• Useful life = how many years you’ll use it

⚙️ Example:

• You buy a laptop for $1,200
• It’ll be worth $200 after 4 years

(1,200 – 200) ÷ 4 = $250 per year

So you deduct $250 every year as depreciation.

2. Declining Balance (or Double Declining Balance)

This method depreciates more at the beginning and less later.

✅ It’s great for tech or cars that lose value fast.

📘 Formula:

Depreciation = Book Value × (2 ÷ Useful Life)

• Book Value = current value each year

⚙️ Example:

• A $1,000 machine with a 5-year life

Year 1:
$1,000 × (2 ÷ 5) = $400

Year 2:
$600 × (2 ÷ 5) = $240

And so on…

⚡ You deduct more early on, less later.

3. Units of Production (For things based on usage)

✅ Perfect if you use your asset based on hours, miles, or units made. Best when use varies year to year.

📘 Formula:

Depreciation per unit = (Cost – Salvage) ÷ Total Expected Units  

Depreciation = Depreciation per unit × Units used this year

⚙️ Example:

• A machine costs $10,000, lasts 100,000 units
• Makes 20,000 units this year

($10,000 – 0) ÷ 100,000 = $0.10 per unit  

0.10 × 20,000 = $2,000 depreciation this year

4. Sum-of-the-Years’ Digits (SYD)

✅ A fancier method that also gives more depreciation in the early years.

📘 Formula:

Remaining Life ÷ SYD Total × (Cost – Salvage)

SYD Total = Add up all the years
(If life is 5 years: 5 + 4 + 3 + 2 + 1 = 15)

⚙️ Example: Year 1: 5/15 × (1,000 – 100) = $300
Year 2: 4/15 × 900 = $240
… and so on

🎯 It’s more precise but used less often.

📌 Quick Comparison

Method	Best For	Depreciation Pattern
Straight-Line	Simple, predictable assets	Even every year
Declining Balance	Tech, cars, fast-depreciating items	High early, low later
Units of Production	Machines, vehicles, usage-based assets	Varies with use
Sum-of-the-Years’ Digits	Assets losing value quickly	Steep early decline

💡 Why It Matters

• Helps businesses track asset value
• Impacts profit and taxes
• Essential for budgeting and planning