Understanding Depreciation Methods in Accounting
By Tax&Facts | Published on | Read: 3 Mins
Depreciation is a vital concept in accounting that helps businesses allocate the cost of tangible assets over their useful lives. Different methods of depreciation allow companies to match expenses more accurately with how an asset is used or how it loses value over time.
In this article, we’ll cover the three most common depreciation methods:
- Straight-Line Depreciation
- Declining Balance Depreciation
- Units of Production Depreciation
We'll explain each method with clear examples and discuss when to use them, along with answers to frequently asked questions.
1. Straight-Line Depreciation
Straight-line depreciation is the simplest and most commonly used method. It spreads the cost of an asset evenly over its useful life.
Formula:
Annual Depreciation = (Cost of Asset − Salvage Value) / Useful Life (in years)
Example:
Asset cost: $50,000
Salvage value: $5,000
Useful life: 5 years
(50,000 − 5,000) / 5 = 9,000 per year
Journal Entry (Year 1):
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Depreciation Expense | 9,000 | |
| Dec 31 | Accumulated Depreciation | 9,000 |
2. Declining Balance Depreciation
Declining balance is an accelerated depreciation method, meaning higher expenses are recorded in the early years of an asset’s life. The most common version is Double Declining Balance (DDB).
Formula (Double Declining Balance):
Depreciation = Book Value at Start of Year × (2 / Useful Life)
Example:
Cost: $40,000
Useful life: 5 years
Rate: 2 / 5 = 40%
Year 1:
40,000 × 40% = 16,000
Year 2:
(40,000 − 16,000) × 40% = 9,600
Journal Entry (Year 1):
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Depreciation Expense | 16,000 | |
| Dec 31 | Accumulated Depreciation | 16,000 |
3. Units of Production Depreciation
Units of production ties depreciation to the usage of the asset, making it ideal for machinery or equipment where wear depends on actual output.
Formula:
Depreciation per Unit = (Cost - Salvage Value) / Total Estimated Units
Annual Depreciation = Depreciation per Unit × Units Produced in Year
Example:
Asset cost: $100,000
Salvage value: $10,000
Estimated total units: 180,000
Units produced in year 1: 30,000
(100,000 − 10,000) / 180,000 = 0.50 per unit
Depreciation (Year 1): 0.50 × 30,000 = 15,000
Journal Entry (Year 1):
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Depreciation Expense | 15,000 | |
| Dec 31 | Accumulated Depreciation | 15,000 |
Which Depreciation Method Should You Use?
| Method | Best For | Expense Pattern |
|---|---|---|
| Straight-Line | General use assets (buildings, office equipment) | Even annual expense |
| Declining Balance | Tech, vehicles (faster obsolescence) | High early expense |
| Units of Production | Manufacturing machinery | Based on usage/output |
Conclusion
Choosing the right depreciation method is essential for accurate financial reporting and tax planning. Whether you need consistency (straight-line), front-loaded expense recognition (declining balance), or usage-based costing (units of production), understanding each approach helps ensure you're aligning costs with real-world asset use.
FAQ Frequently Asked Questions (FAQ)
Q1: Is one depreciation method better than the others?
A1: It depends on how the asset is used. Straight-line is simple and common,
while declining balance is better for fast-depreciating assets. Units of
production is best when depreciation should reflect actual usage.
Q2: Can a business change depreciation methods later?
A2: Yes, but it usually requires justification and may need to be disclosed
in financial statements or approved by tax authorities.
Q3: Do all methods affect net income?
A3: Yes, but the timing differs. Accelerated methods (like declining
balance) reduce early profits more than straight-line.
Q4: Is depreciation tax-deductible?
A4: Yes. Depreciation reduces taxable income, but the allowed methods and
rates vary by country and tax law.
Article History
v1.0 (May 19, 2025): Initial publication of the article