Same total, different timing
Depreciation is the systematic allocation of a fixed asset's cost, less its expected salvage value, over the periods that benefit from using it. Under US GAAP (FASB Accounting Standards Codification Topic 360), depreciation matches an asset's cost to the revenue it helps generate rather than expensing the full cost at purchase — it's an accounting allocation, not a measure of the asset's actual market value at a given date.
The method chosen changes only the timing of the depreciation expense, not the total amount depreciated over the asset's life. Straight-line depreciation spreads the depreciable base evenly across the useful life; double-declining balance is an accelerated method that front-loads more expense into the early years. Both reach the same (cost − salvage) total by the end of the useful life.
Straight-line, worked
Straight-line depreciation divides the depreciable base evenly by the useful life: annual depreciation = (cost − salvage) ÷ useful life. A $50,000 asset with a $5,000 salvage value and a 5-year life has a $45,000 depreciable base, so straight-line depreciation is $45,000 ÷ 5 = $9,000 every year, unchanged from year 1 through year 5.
Double-declining balance, worked
Double-declining balance applies a fixed rate — 2 ÷ useful life — to the asset's remaining book value each year, producing a shrinking expense that's floored so book value never falls below the salvage estimate. For the same $50,000 asset with a 5-year life, the rate is 2 ÷ 5 = 40%. Year 1 charges 40% of the full $50,000 cost: $20,000. Year 2 applies that same 40% rate to the new book value ($50,000 − $20,000 = $30,000): $12,000.
- Straight-line: annual depreciation = (cost − salvage) ÷ life → $45,000 ÷ 5 = $9,000/year
- DDB rate = 2 ÷ useful life → 2 ÷ 5 = 40%
- DDB year 1 = book value × rate → $50,000 × 40% = $20,000
- DDB year 2 = new book value × rate → $30,000 × 40% = $12,000
Which method fits which asset
Straight-line suits assets that lose value evenly over time, such as office furniture. Double-declining balance suits assets that lose most of their value early, such as vehicles or computers. Sum-of-the-years'-digits, a third accelerated method, sits between the two — also front-loaded, but smoother than DDB — and is used for assets with moderate early wear and tear.
Book depreciation is not tax depreciation
None of these three methods is what the IRS requires for US federal income tax purposes. Tax depreciation generally follows the Modified Accelerated Cost Recovery System (MACRS), described in IRS Publication 946, which uses fixed statutory recovery periods and percentage tables rather than straight-line, DDB, or sum-of-the-years'-digits directly — tax depreciation and book (financial-statement) depreciation are commonly calculated separately, and confusing the two is a frequent source of error.
अक्सर पूछे जाने वाले सवाल
What's the difference between straight-line and accelerated depreciation?
Straight-line depreciation charges an equal expense every year of an asset's useful life. Accelerated methods, such as double-declining balance, charge more depreciation in the early years and less later, though both reach the same total depreciation (cost minus salvage) by the end of the useful life.
Does the depreciation method affect total depreciation over an asset's life?
No. Straight-line and double-declining balance depreciate the same total depreciable base (cost minus salvage value) over the asset's useful life — only the year-by-year timing of the expense differs. A $50,000 asset with a $5,000 salvage value depreciates $45,000 in total under either method.
How is double-declining balance depreciation calculated?
The rate is 2 divided by the useful life, applied to the asset's remaining book value each year (not the depreciable base). For a $50,000 asset with a 5-year life, the rate is 40%, so year 1 depreciation is $50,000 × 40% = $20,000, and year 2 applies 40% to the new $30,000 book value for $12,000.
Which depreciation method does the IRS require for tax purposes?
Neither straight-line nor double-declining balance directly. US federal tax depreciation generally follows the Modified Accelerated Cost Recovery System (MACRS) described in IRS Publication 946, which applies fixed statutory recovery periods and percentage tables that differ from standard book depreciation methods.
संदर्भ
- Financial Accounting Standards Board (FASB). Accounting Standards Codification, Topic 360, Property, Plant, and Equipment. fasb.org.
- Internal Revenue Service. Publication 946, How To Depreciate Property. irs.gov.
- U.S. Small Business Administration. Understanding financial statements. sba.gov.
- Kieso DE, Weygandt JJ, Warfield TD. Intermediate Accounting. Wiley.