Depreciation methods: SLN, SYD, declining balance and units of production
Four ways to expense one asset — straight-line, sum-of-years-digits, declining balance and units of production — worked on the same 10,000/1,000/5 asset.
Depreciation spreads one asset's cost over the years it produces revenue. The math is simple, but the pattern you choose moves profit between periods — and with it, taxes. All four classic methods can be reproduced on one example: cost 10,000, salvage 1,000, useful life 5 years.
Straight line: the flat baseline
Straight line expenses the depreciable base evenly: (cost − salvage) ÷ life = (10,000 − 1,000) ÷ 5 = **1,800** per year, engine-verified. Book value falls in equal 1,800 steps from 10,000 down to exactly 1,000. It is the default in financial reporting precisely because it is smooth, predictable and hard to argue with.
Sum-of-years-digits: acceleration by a countdown
SYD weights the depreciable base by a countdown fraction. The digit sum for 5 years is 15; year 1 gets 5/15 of the base, year 2 gets 4/15, and so on: 3,000 then 2,400, then 1,800, 1,200 and 600. Same 9,000 total, front-loaded — the schedule assumes the asset loses most of its usefulness early.
Declining balance: a fixed rate on a shrinking base
The double-declining method applies twice the straight-line rate — 2/5 = 40% here — to the book value, not the depreciable base: year 1 takes 4,000, year 2 takes 2,400. Because the base shrinks geometrically, pure 40% would eventually undershoot the salvage floor; the engine therefore stops depreciation from pushing book value below salvage. In the final year only 296 is allowed — exactly the remaining cushion (1,296 − 1,000) — while year 4's pure-DB figure of 864 matches the engine to the digit.
Units of production: depreciation that follows activity
When wear tracks usage rather than time, expense per unit is (cost − salvage) ÷ total lifetime units. On a 50,000 asset with 5,000 salvage and 100,000 total units the rate is 0.45 per unit; a year using 30,000 units expenses 13,500, a year using 20,000 expenses 9,000, and the schedule ends with book value exactly at salvage — total depreciation 45,000, engine-verified.
| Method | Year 1 | Year 2 | Pattern |
|---|---|---|---|
| Straight line | 1,800 | 1,800 | constant |
| Sum-of-years-digits | 3,000 | 2,400 | declining arithmetic |
| Double declining balance | 4,000 | 2,400 | declining geometric |
| Units of production* | 13,500 | 11,250 | follows usage |
*The units row uses its own asset (50,000 / 5,000 / 100,000 units); year 2 assumes 25,000 units × 0.45 = 11,250.
The tax shield: why the pattern matters
Depreciation is a non-cash expense, but it reduces taxable income — each unit of depreciation saves tax rate × depreciation in cash tax, the depreciation tax shield. Accelerated methods (SYD, DDB) pull shields earlier, which raises their present value even when total shields are identical. That is the whole financial logic behind tax codes letting firms depreciate faster than they report.
Frequently asked questions
Which depreciation method should a company choose?
Reporting and tax are separate choices. Financial reporting usually matches expense to the benefit pattern — straight line for even benefits, units of production when wear tracks usage. Tax filings often prefer accelerated schedules (declining balance families) because earlier depreciation means earlier tax shields and a higher present value of cash.
What exactly is salvage value?
The estimated residual value at the end of the useful life — what the asset is worth when you are done with it. Only cost minus salvage (the depreciable base) is ever expensed. In the worked example the 10,000 asset with 1,000 salvage expenses exactly 9,000 under every method, and book value stops at 1,000.
Why is the final year of declining balance different?
Pure 40% depreciation on a shrinking book value would eventually drop below the 1,000 salvage floor. The engine (like the BA II Plus DB function) therefore caps depreciation so book value lands exactly on salvage: in year 5 only 296 is taken — the remaining 1,296 − 1,000 — instead of the geometric 518.4.
Practice it live
Open the matching worksheet and reproduce every number in this article.
Open calculator