Depreciation calculator, three methods side by side
Your data
The tax rate and the discount rate are fields rather than constants, because both belong to your country and to your company and neither belongs in the code of a page. Which methods your accounting rules actually allow is a separate question, and this page does not answer it.
Results
What the fastest method is worth over the straight line one, in today's money
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| Total there is to depreciate, whichever method you pick | — |
| Tax saved in total, also the same either way | — |
| That saving in today's money, straight line | — |
| The same, sum of the years | — |
| The same, declining balance | — |
| Where declining balance would leave the book value if nothing corrected it | — |
The three schedules side by side
| Year | Straight line | Sum of the years | Declining balance |
|---|
The bottom row is the whole first point. Three columns that look nothing alike add up to the same number, because all any of them can write off is what the asset cost minus what it will be worth at the end. The choice never changes the total. It only changes the calendar.
Which is exactly why the choice is still worth making. The tax saved is the same in every column, but a saving that arrives in year one is worth more than the same saving in year five, and the gap between the columns above is that difference and nothing else. The clean way to see it is to set the discount rate to zero: the three become identical to the cent, because with no discount rate there is no such thing as sooner.
The declining balance method has a quirk worth knowing about, because it explains why the last year of it never looks like the others. It takes a fixed share of the remaining book value, so it never looks at the value you expect at the end at all: left uncorrected it always lands on the cost times one minus twice the reciprocal of the life, raised to the life. On five years that is under eight in a hundred of the cost, and on twenty years it is over twelve, climbing towards about thirteen and a half. So it overshoots when you expect a high value at the end and undershoots when you expect a low one, and either way something has to correct it. The correction is what the last figure in that column really is.
Which depreciation method gives the biggest deduction?
None of them, in total. All three write off exactly the same amount, which is what the asset cost minus what it is worth at the end, so the tax saved over the whole life is identical whichever you use.
What changes is when the deduction lands. On a hundred thousand with ten thousand left at the end over five years, straight line writes off eighteen thousand every year, sum of the years starts at thirty thousand and ends at six, and declining balance starts at forty thousand and ends at under three.
| Year | Straight line | Sum of the years | Declining balance |
|---|---|---|---|
| 1 | 18000 | 30000 | 40000 |
| 2 | 18000 | 24000 | 24000 |
| 3 | 18000 | 18000 | 14400 |
| 4 | 18000 | 12000 | 8640 |
| 5 | 18000 | 6000 | 2960 |
| Total | 90000 | 90000 | 90000 |
If the total is the same, why does the method matter?
Because a tax saving in year one is worth more than the same saving in year five. At a thirty per cent tax rate and a ten per cent discount rate, the twenty seven thousand saved is worth 20,470 in today's money under straight line, 21,766 under sum of the years and 22,427 under declining balance.
The neatest way to see that this is the whole story is to set the discount rate to zero. The three methods then come out identical to the cent, because with no discount rate there is no such thing as sooner.
| Method | Tax saved | Worth today |
|---|---|---|
| Straight line | 27000 | 20470 |
| Sum of the years | 27000 | 21766 |
| Declining balance | 27000 | 22427 |
Why does the last year of declining balance look wrong?
Because the method never looks at the value you expect at the end. It takes a fixed share of the remaining book value every year, so on its own it always lands on the cost times one minus twice the reciprocal of the life, raised to the power of the life, no matter what residual value you had in mind.
On a five year life that is 7.78 per cent of the cost, on ten years 10.74 per cent and on twenty years 12.16 per cent, climbing towards about 13.53 per cent. So the raw method overshoots when you expect a high value at the end and undershoots when you expect a low one, and either way something has to correct it. That correction is what the last figure in the column really is.
| Useful life | Where the raw method lands, as a share of cost |
|---|---|
| 5 years | 7.78% |
| 10 years | 10.74% |
| 20 years | 12.16% |
| very long | about 13.53% |
What is the residual value and does it change the total?
It is what you expect the asset to be worth when you are done with it, and it changes the total directly: what you depreciate is the cost minus that figure, and nothing more.
It is also the number people leave at zero out of habit. If the asset really will be worth something, putting zero there overstates every year of the schedule.
Can I choose whichever method I like?
That depends on your accounting rules and on your tax authority, and it is not a question arithmetic can answer. Some regimes prescribe the method, some allow a choice, and some allow one method for the accounts and another for tax.
What this page can tell you is what each choice is worth, so that when the rules do leave a choice you know the size of it rather than guessing.
Why is a discount rate needed to compare them at all?
Because without one there is nothing to compare. The totals are identical by construction, so any difference between the methods has to come from timing, and timing only has a price if money has a price.
The rate to use is the one your company already uses to weigh money across years. If you do not have one, running the page at a few different rates shows how much the answer depends on it.
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