Depreciation, Three Ways: Straight-Line vs. Declining Balance vs. Sum-of-Years-Digits

Depreciation is the accountant's way of admitting that a delivery van does not stay worth $25,000 forever. Each year you write off part of the cost as an expense, the asset's book value drops, and by the end of its useful life the books carry it at whatever you expect to sell it for. The tricky part is not the idea — it is choosing how fast to write the value down. Pick the wrong method and your tax timing, your balance sheet, and your gain-or-loss on a future sale all shift.

There are three methods every accounting textbook teaches, and all three are built into the Depreciation Calculator. They differ only in timing: the total amount written off over an asset's life is identical no matter which one you choose. What changes is which years carry the expense.

The depreciable base is cost minus salvage, not cost

Before any method runs, you need the depreciable base. This is the single most common mistake I see people make: they depreciate the full purchase price instead of the part that actually loses value.

The base is cost − salvage value. Salvage value (also called residual or scrap value) is what the asset is expected to be worth at the end of its useful life. Depreciation only ever writes the asset down to that floor and stops. So a $10,000 machine with a $2,000 salvage value depreciates a total of $8,000 across its entire life — never $10,000 — regardless of method. Treat the full $10,000 as the base and you inflate every single year's expense.

That floor is also why a well-built schedule ends with the book value landing exactly on salvage. The total written off equals cost minus salvage, so by the final year the carrying amount has to equal salvage by definition.

Straight-line: the default for a reason

Straight-line spreads the depreciable base evenly across the useful life:

expense per year = (cost − salvage) / life

A machine that costs $10,000 with a $1,000 salvage value over 9 years depreciates (10,000 − 1,000) / 9 = $1,000 every single year. After year one the book value is $9,000; after year nine it sits exactly at the $1,000 salvage. No surprises, no front-loading. Most small businesses default to it because it is the easiest to explain to a tax preparer and the easiest to forecast.

The trade-off: straight-line ignores the real world, where most assets lose a chunk of value the moment they leave the lot. A two-year-old laptop is worth far less than 80% of its purchase price. That is what the accelerated methods are for.

Double declining balance: front-load the expense

Double declining balance (DDB) doubles the straight-line rate and applies it to the remaining book value, so it writes off the most in the early years. The rate is 2 / life, and the first-year expense is (2 / life) × cost.

For a $10,000 asset over 5 years the rate is 0.4, so year one takes 0.4 × 10,000 = $4,000. Each later year applies 40% to the shrinking book value, and the final year is "trued up" so the book value lands exactly on salvage rather than overshooting below it. Without that true-up, a naive declining-balance formula would keep writing the asset down past its salvage floor — over-depreciating it, which the IRS does not allow.

DDB is the method to reach for when an asset genuinely loses value fast early on, or when you want the largest deduction in year one for tax-timing reasons.

Sum-of-years-digits: accelerated, but gentler

Sum-of-years-digits (SYD) is also front-loaded, but smoother than declining balance. Add the year numbers: for a 5-year life that is 1 + 2 + 3 + 4 + 5 = 15. Year one uses 5/15 of the base, year two 4/15, down to 1/15 in the last year.

With a $9,000 base, year one is 5/15 × 9,000 = $3,000 and year five is 1/15 × 9,000 = $600. It front-loads expense like DDB, but every year is a fixed fraction of the same base, which makes it easier to audit than the compounding declining-balance calculation.

A worked example: the $25,000 van

Here is the comparison I actually ran in the tool. Inputs: cost $25,000, salvage $3,000, useful life 5 years. The depreciable base is 25,000 − 3,000 = $22,000. Watch how year one alone diverges across methods:

| Year | Straight-line | Double declining balance | Sum-of-years-digits | |------|--------------|--------------------------|---------------------| | 1 | 4,400 | 10,000 | 7,333 | | 2 | 4,400 | 6,000 | 5,867 | | 3 | 4,400 | 3,600 | 4,400 | | 4 | 4,400 | 1,560 | 2,933 | | 5 | 4,400 | 840 | 1,467 | | Total | 22,000 | 22,000 | 22,000 |

Three things stand out. First, year one swings from $4,400 under straight-line to $10,000 under DDB — more than double the deduction. Second, the totals are identical: every method writes off exactly $22,000, leaving the van carried at its $3,000 salvage. Third, DDB's final year is the true-up value (840), not a clean 40% of book value — that is the clamp keeping the schedule from dipping below salvage.

When I tested this, the part I appreciated most was the accumulated-depreciation column. For a financing conversation, a lender does not care about a single year's expense — they want the carrying amount three years in. Reading the year-three book value straight off the table (25,000 minus the accumulated total) gives the exact collateral figure without rebuilding a spreadsheet formula and debugging an off-by-one in the year index.

When to use which

Straight-line when simplicity matters most and the asset loses value evenly — buildings, furniture, software amortized over a fixed term.
Double declining balance when you want the largest early deduction or the asset genuinely depreciates fast — vehicles, computers, equipment that is obsolete quickly.
Sum-of-years-digits when you want acceleration but a smoother, easier-to-audit curve than DDB.

A quick reminder on inputs: depreciation here is annual, so a fractional life like 4.5 years produces a meaningless schedule. Use whole years, at least one.

Depreciation is one piece of the asset-decision puzzle. If you are weighing whether the asset earns its keep at all, the ROI Calculator handles the return side of the same question. Run the depreciation schedule first to know your real carrying cost, then check the return — the two numbers together tell you whether the purchase actually pays.

Made by Toolora · Updated 2026-06-13