Depreciation Calculator

What Is Depreciation?

Depreciation is the systematic allocation of an asset's cost over its useful life. It recognizes that tangible assets like machinery, vehicles, and equipment lose value over time through use, wear and tear, or technological obsolescence. While the asset doesn't physically leave the business, its economic value declines.

Straight-Line Method

The simplest and most widely used method. Annual depreciation = (Cost − Salvage Value) ÷ Useful Life. Each year receives an equal amount. It's suitable for assets that provide consistent utility over their lifespan, such as office furniture or buildings.

Declining Balance Method

An accelerated method that front-loads depreciation. Each year's depreciation is calculated by applying a fixed rate to the remaining book value. Double declining balance (200%) is most common. This better reflects assets that lose value quickly in early years, like vehicles and technology.

Sum-of-Years Digits

Another accelerated method. It uses a fraction where the numerator is the remaining useful life and the denominator is the sum of all years' digits. For a 5-year life: sum = 15, year 1 fraction = 5/15, year 2 = 4/15, etc. It produces higher early depreciation than straight-line but less aggressive than declining balance.

Depreciation for Tax

Tax depreciation (capital allowances in the UK, MACRS in the US) often differs from accounting depreciation. Nigeria allows initial allowances plus annual allowances under the Companies Income Tax Act (CITA). These tax depreciation schedules are set by law and may not match the asset's actual useful life.

Impact on Financial Statements

Depreciation appears as an expense on the income statement, reducing reported profit. On the balance sheet, accumulated depreciation reduces the asset's carrying value. On the cash flow statement, it's added back as a non-cash charge. Understanding these interactions is fundamental to financial analysis.