Accumulated Depreciation

What is accumulated depreciation?

Accumulated depreciation is the running total of depreciation expense recorded against a tangible asset since it was placed in service. On the balance sheet it is a contra-asset: historical cost minus accumulated depreciation equals book value. This calculator supports the four common book methods: straight-line, declining balance, sum of the years digits, and units of production. All math runs in your browser.

Period depreciation is an explicit cost on the income statement. After you know this year's expense, the accounting profit calculator subtracts depreciation along with operating costs, interest, and taxes from revenue. Because depreciation is a non-cash accrual, the accrual ratio calculator is a useful next screen for how much reported earnings depend on accounting allocations rather than cash. For a REIT, period depreciation is added back when converting GAAP earnings into funds from operations, then refined into AFFO with the AFFO calculator. Insurance claims use a different starting point: current replacement cost, not historical cost. The actual cash value calculator applies remaining useful life to today's replacement cost instead of the ledger methods here.

Straight-line method

Straight-line spreads the depreciable base evenly across useful life. The depreciable base is cost minus salvage (residual) value. Salvage is the estimated amount the asset will be worth at the end of its useful life.

C is cost, S is salvage, n is useful life in years, and t is years elapsed. OpenStax works a silk-screen machine that costs $10,000, has $1,000 salvage, and a five-year life. Annual expense is $1,800. After two years, accumulated depreciation is $3,600 and book value is $6,400. Corporate Finance Institute uses a $100,000 machine with $20,000 salvage and a five-year life: $16,000 each year, so $48,000 accumulated after three years.

Declining-balance method

Declining balance is an accelerated method. Each year you multiply beginning book value by a fixed rate. Salvage is not subtracted before applying the rate. Depreciation stops when book value reaches salvage, so the asset is never written below that floor.

Double-declining balance uses twice the straight-line rate: r = 2 / n. For a five-year asset that is 40%. OpenStax applies that rate to the $10,000 machine: year one expense is $4,000 and year two is $2,400, so accumulated depreciation after two years is $6,400. Enter 40 in the rate field to run double-declining balance, or any other declining-balance percentage your policy uses.

Sum of the years digits

Sum of the years digits (SYD) is another accelerated method. It applies a shrinking fraction to the full depreciable base (cost minus salvage). The denominator is the sum of the years of useful life.

For a five-year life, SYD is 15 and the fractions are 5/15, 4/15, 3/15, 2/15, and 1/15. A standard textbook example uses $1,000 cost, $100 salvage, and five years. The depreciable base is $900. Year one expense is $300 and year two is $240, so accumulated depreciation after two years is $540 and book value is $460. The U.S. tax regulations at 26 CFR 1.167(b)-3 describe the same remaining-life fraction applied to cost minus estimated salvage.

Units of production

Units of production ties expense to usage rather than calendar time. Divide the depreciable base by estimated total units (pages, hours, miles, or items), then multiply by units produced to date. Accumulated depreciation cannot exceed the depreciable base.

In the OpenStax example, estimated output is 100,000 presses and the rate is $0.09 per press. Year one production of 20,000 items costs $1,800. Year two production of 30,000 items costs $2,700. After those two years, enter 50,000 units produced to date to get $4,500 of accumulated depreciation.

Book methods versus tax depreciation

GAAP and IFRS let a company choose straight-line, declining balance, units of production, or (less often) sum of the years digits for financial statements. U.S. tax depreciation for most business property uses MACRS, which is a statutory percentage table, not one of these four formulas. Use this calculator for book value and accounting expense. Do not treat the result as a tax deduction schedule.

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