Calculation of Depreciation Expense – Formula, Methods & Online Tool

Depreciation is a key accounting concept used to allocate the cost of tangible assets over their useful life. Accurate calculation of depreciation expense is essential for preparing financial statements, optimizing tax deductions, and budgeting for asset replacement.

📌 What is Depreciation Expense?

Depreciation expense represents the gradual reduction in the value of a fixed asset due to usage, wear and tear, or obsolescence. It is recorded annually (or monthly) on a business’s income statement.

Assets commonly depreciated include:

• 🏢 Buildings
• 🚗 Vehicles
• 🛠️ Machinery
• 💻 Computers
• 🪑 Furniture

🧠 Methods of Calculating Depreciation Expense

Here are the most commonly used methods:

1️⃣ Straight-Line Method (SLM)

Formula:
Depreciation Expense = (Cost – Salvage Value) ÷ Useful Life

📘 Example:

• Asset Cost = ₹10,00,000
• Salvage Value = ₹1,00,000
• Useful Life = 5 years
• Depreciation = (10,00,000 – 1,00,000) ÷ 5 = ₹1,80,000 per year

2️⃣ Diminishing Balance / Declining Balance Method

Formula:
Depreciation = Book Value × Rate of Depreciation

This method gives higher depreciation in earlier years, commonly used for tax purposes.

3️⃣ Units of Production Method

Formula:
Depreciation = [(Cost – Salvage Value) ÷ Estimated Units of Use] × Units Used in Period

Best for machines used irregularly.

4️⃣ Sum-of-the-Years’-Digits (SYD)

Uses an accelerated approach by applying fractions of total useful years in reverse order. Less common but still valid for tech assets.

🛠️ Use Our Free Depreciation Expense Calculator

Input Fields:

• Asset Purchase Price
• Salvage/Residual Value
• Estimated Useful Life
• Choose Method (SLM, DBM, etc.)
• Start Date

📊 Why Calculating Depreciation Matters

• 🧾 Required for tax returns and audits
• 📉 Impacts net profit & asset valuation
• 🧮 Helps with capital budgeting and replacement planning
• 💼 Critical for accurate balance sheet & income statement

📖 FAQs – Depreciation Expense Calculation

❓ What is the most commonly used method?

The Straight-Line Method is most widely used for financial reporting. The Diminishing Balance Method is often preferred for tax purposes.

❓ Can land be depreciated?

No. Land is not depreciated because it has an unlimited useful life.

❓ Is depreciation a cash expense?

No. It is a non-cash accounting expense, meaning it affects profit but not cash flow.

❓ How does depreciation affect taxes?

It reduces taxable income, lowering your tax liability.

❓ Can I depreciate intangible assets?

Yes, but it’s called amortization, not depreciation.

✅ Final Thoughts

Proper calculation of depreciation expense ensures financial accuracy, tax compliance, and better capital management. Use our free tool to automate calculations across different methods and asset types.