How to Calculate Depreciation for Small Business (Every Method, Worked Out)

A $30,000 delivery truck lands in January. Should this year's profit swallow the whole $30,000? Not even close — and that gap is exactly what depreciation exists to fix. The truck will pull its weight for five years, so accounting parcels its cost out across those five years to line the expense up with the revenue it helps generate. Figuring out how to calculate depreciation is, at heart, about keeping your statements honest: expense the truck all at once and your business looks like it bled money this year and printed it for the next four — none of which is real.

Below we'll cover the three figures every calculation depends on, the four depreciation methods small businesses genuinely reach for — each with a fully worked schedule — and how the final number gets written into your books. No accounting background needed.

The Three Figures Every Method Starts With

Choose a method later; first you need three inputs. Every formula that follows is just a different way of carving these up.

• Cost (the cost basis). Everything you paid to acquire the asset and get it running — sticker price plus freight, installation, and setup. A $48,000 machine with $2,000 of installation carries a $50,000 basis.
• Salvage value (residual value). What you reckon the asset will fetch at the end of its life — trade-in or scrap. It's an estimate, and plenty of small businesses simply set it at $0 for tidiness, which is fine as long as it's an honest call.
• Useful life. How long (in years, or in units produced) the asset will earn its keep. A laptop might run 3 years, office furniture 7, a delivery truck 5. Industry conventions and IRS class lives are handy benchmarks.

The depreciable base — the slice you actually spread — is cost minus salvage value. For the truck: $30,000 − $5,000 = $25,000. That $25,000 is what gets divided up; the $5,000 remains as the asset's floor.

Method 1: Straight-Line (The Everyday Default)

Straight-line splits the cost evenly — an identical expense each year. It's the simplest to compute, the easiest to walk a lender through, and the right pick for assets that fade steadily with age rather than through heavy early use.

The formula:

Annual depreciation = (Cost − Salvage value) ÷ Useful life

For the $30,000 truck with a $5,000 salvage value and 5-year life: ($30,000 − $5,000) ÷ 5 = $5,000 per year. The complete schedule:

See how the book value bottoms out at the $5,000 salvage figure — that's where depreciation stops. Sell the truck for more or less than $5,000 at that stage and the difference books as a gain or loss on the sale.

Method 2: Declining Balance (Weighted to the Early Years)

Declining balance loads more expense up front and eases off later. It fits assets that shed value quickly when new — computers, vehicles, anything that's worth visibly less after twelve months. The go-to variant is double-declining balance, which runs at twice the straight-line rate.

Straight-line across 5 years is 20% annually, so double-declining is 40%. The twist: you apply that rate to the asset's book value each year — not the depreciable base — and set salvage aside until the very end:

*A full 40% in year 4 ($2,592) would drop the book value under the $5,000 salvage floor, so you take only enough ($1,480) to touch down exactly on it. Stack year 1 here — $12,000 — against straight-line's $5,000: same lifetime total, wildly different timing.

Method 3: Sum-of-the-Years'-Digits (A Softer Acceleration)

Sum-of-the-years'-digits (SYD) accelerates more gently than declining balance. Add the digits of the useful life for a denominator, then apply a shrinking fraction to the depreciable base each year.

Over a 5-year life: 5 + 4 + 3 + 2 + 1 = 15. Year 1 takes 5/15, year 2 takes 4/15, and so on — always against the $25,000 depreciable base:

SYD front-loads like declining balance but tapers more evenly and settles neatly on salvage value without the year-end cap trick. You'll see it less often in the wild, but it suits assets whose productivity tails off gradually.

Method 4: Units of Production (Pegged to Actual Use)

Units of production links depreciation to how hard the asset works, not to the calendar. It's the natural fit for anything whose wear tracks output — a truck in miles, a press in impressions, a machine in run-hours. A truck flogged all year depreciates faster than one that rarely leaves the yard.

Start by finding the rate per unit:

Rate per unit = (Cost − Salvage value) ÷ Total estimated units

Suppose the truck is rated for 100,000 miles. Rate = $25,000 ÷ 100,000 = $0.25 per mile. Cover 22,000 miles in year one and depreciation is 22,000 × $0.25 = $5,500. Log only 12,000 miles the year after and it drops to $3,000. The charge breathes in and out with real usage — which is precisely why manufacturers and fleet owners favor it.

So Which Depreciation Method Fits You?

For the majority of small businesses, straight-line is the correct book answer — plain, predictable, and instantly familiar to any lender. Turn to the others only when they honestly capture how a particular asset loses value.

Booking Depreciation: The Journal Entry

Running the numbers is only half the work — the figure still has to go into the books. Depreciation posts as a tidy two-line double entry: debit Depreciation Expense (which trims profit on the income statement) and credit Accumulated Depreciation (a contra-asset that lowers the asset's value on the balance sheet).

For the straight-line truck, the monthly entry is $5,000 ÷ 12 ≈ $417:

Notice what stays put: the truck's original $30,000 cost never budges from the Fixed Assets block of your balance sheet. Accumulated depreciation simply grows beside it, and the gap between the two — net book value — is the asset's worth on paper today. This is a textbook month-end close entry: post it monthly and each period's profit carries the true cost of running your equipment.

Book Depreciation vs. Tax Depreciation

Here's the catch that ambushes most owners: the depreciation on your statements and the depreciation on your tax return are frequently different numbers. That's normal, not a mistake.

Book depreciation is what you record to keep your financials accurate — usually straight-line, as above. Tax depreciation plays by the tax code's rules. In the U.S. that's MACRS (the Modified Accelerated Cost Recovery System), often supercharged by Section 179 expensing or bonus depreciation, either of which can let you deduct most or all of an asset's cost in the purchase year.

So the same truck might depreciate $5,000 on your books yet be almost entirely written off on your return in year one. Don't wrench your books to mirror the tax return — keep clean, honest book records with the methods above and let your tax preparer apply the tax rules at filing. Your accounting system's job is an accurate portrait of the business; your return's job is trimming tax within the law. They're allowed to disagree.

The Takeaway

Depreciation isn't bookkeeping filler — it's how your statements tell the truth about assets that earn over many years. Nail the three inputs (cost, salvage value, useful life), pick the method that mirrors how the asset actually loses value (straight-line for most, an accelerated method for fast-fading tech, units of production for usage-driven machinery), and record the charge as a monthly entry against accumulated depreciation. Do that and every balance sheet you hand a lender shows what your gear is genuinely worth — and every month's profit reflects the real cost of keeping the lights on.

Want the mechanics underneath to click? Our free interactive accounting course lets you practice journal entries, depreciation included, in a hands-on sandbox at your own pace.

Frequently Asked Questions

How do I calculate depreciation for my business?

You need three figures: what the asset cost, its salvage value (its worth at the end), and how many years it will serve you. The plainest method is straight-line: subtract salvage from cost, then divide by the years of useful life. A machine costing $30,000 with a $5,000 residual value over 5 years works out to ($30,000 − $5,000) ÷ 5 = $5,000 a year. The other three methods (declining balance, sum-of-the-years'-digits, units of production) reshape the timing, but they all begin with those same three figures.

Which depreciation method is simplest?

Straight-line, hands down, and it's what most small businesses use for their books. The same amount is expensed every year, so it's quick to work out, easy to justify to a bank, and gives you steady, readable statements. Save the accelerated methods for assets that really do lose value faster up front or wear out by how much you use them rather than by age.

Why is my tax depreciation different from my book depreciation?

Because they answer two different questions. Book depreciation keeps your financial statements truthful and is usually straight-line. Tax depreciation follows the tax code — in the U.S., MACRS, often sped up by Section 179 or bonus depreciation so you can deduct much of the cost immediately. The same asset can carry two different figures in the same year, and that's completely normal. Keep tidy book records and let your preparer handle the tax version.

What does accumulated depreciation mean?

It's the total depreciation booked against an asset since purchase — a contra-asset account parked beneath the asset on your balance sheet, pulling its value down. A $30,000 truck with $10,000 of accumulated depreciation has a net book value of $20,000. The purchase price stays fixed forever; accumulated depreciation just keeps climbing each period until the asset is written down to its salvage value.

Should depreciation be posted every month or once a year?

Monthly is the better habit on accrual books — divide the yearly figure by twelve and post it during your month-end routine so every month's profit is accurate. Booking a full year in one shot is quicker but flatters eleven months and punishes the twelfth, distorting how each period actually performed.

Which assets get depreciated?

Physical things you own and use in the business that last beyond a year and wear down over time — trucks, machines, computers, desks, tools. Land isn't depreciated because it doesn't wear out, inventory is expensed when it sells, and anything consumed within a year is just an ordinary expense. Intangibles such as patents are handled the same way, but the process is called amortization instead of depreciation.

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