How this instrument works
Straight-line depreciation answers a bookkeeping question rather than a market one: of the money sunk into a machine, how much belongs to this year's accounts? Subtract what you expect to recover when you retire it — the salvage value — from what you paid. That remainder is the depreciable base, and it is sliced evenly across the years of service. Evenness is the assumption, and it suits assets that wear by the calendar more than by use: shop fit-outs, shelving, a trailer that goes out six days a week.
The second output restates the same charge as a percentage of original cost, which is how a controller compares equipment of wildly unlike price. An $80,000 press written down over twenty years and a $900 laptop written down over three both collapse to one number apiece, and a schedule of such percentages is far quicker to audit than a column of dollars.
Its limits are worth stating plainly. A straight line is a convention, not a measurement — a van sheds a fifth of its resale price in month one and almost nothing in year nine, yet the ledger insists on equal slices throughout. The charge also carries no financing cost, no repairs, and no obligation to match tax rules; US federal returns generally run on MACRS, which front-loads deductions instead.
- Enter Purchase cost, $ — the invoice price plus freight, installation and whatever else was needed to put the thing into service.
- Set Salvage value, $ to what you expect a buyer to pay when you retire the asset. Use zero if you intend to scrap it.
- Give Useful life, years: the service period you genuinely expect, which is rarely the warranty and rarely the tax class life.
- Read Annual depreciation for the yearly charge, then Depreciation rate, % for that charge expressed as a share of original cost.
Worked example — a bakery's $10,000 oven
A bakery buys a deck oven for $10,000 delivered and installed. The owner expects eight years of six-day weeks out of it, and reckons a used unit will still fetch about $2,000 from a restaurant supplier at the end of that run. Enter cost 10,000, salvage 2,000, life 8.
That leaves a depreciable base of $8,000, and eight equal slices make Annual depreciation = $1,000. Against the $10,000 originally paid, that is a Depreciation rate of 10% a year. From the first full year onward, $1,000 of the oven's carrying value moves off the balance sheet and lands in the accounts as an expense — in slow years and busy ones alike.
Questions
Why isn't the rate simply 1 divided by the useful life?
Because salvage comes out first. One eighth is 12.5%, but the oven above shows 10%, since only $8,000 of its $10,000 price is ever written down — the last $2,000 stays on the books as residual value until the asset is sold or scrapped. The two figures agree only when you set salvage to zero.
Does the book value here match what the asset is worth?
Rarely, and it isn't meant to. Book value is original cost minus the depreciation charged so far; market value is whatever somebody will pay today. A three-year-old van usually sells well below its straight-line book value, while a well-kept lathe may sell above it. Accountants accept the gap because a smooth, predictable charge is easier to verify than a fresh appraisal every year.
What belongs inside Purchase cost, $?
Everything spent getting the asset ready to work: invoice price, freight, non-refundable duties, rigging, wiring, and test runs. Staff training, extended warranties and loan interest are normally expensed as they occur rather than capitalised. Land is never depreciated at all, so a property figure must be split between the building and the ground beneath it before it comes anywhere near this formula.
Can I put this number straight onto a tax return?
Usually not. Books and taxes are separate systems: US federal rules generally apply MACRS, which uses declining-balance percentages, fixed recovery periods and a half-year convention, and Section 179 or bonus provisions can allow much of the cost to be deducted immediately. Straight-line remains the standard for financial statements and internal budgeting. IRS Publication 946 sets out the tax method; a qualified preparer can confirm which class your asset falls into.
How does this differ from declining balance?
Straight-line charges the same amount every year; declining balance applies a fixed percentage to a book value that keeps shrinking, so the early years are heavy and the later ones light. Double-declining on the same oven would take 25% of $10,000 — $2,500 — in year one, against $1,000 here. Both approaches write off the same $8,000 in the end; only the timing changes.
How should I choose the salvage value?
Look at what similar used units actually sell for at that age, then subtract the cost of removing and shipping the asset. Plenty of firms simply set zero for small equipment, which is conservative and keeps the arithmetic tidy. Watch the effect: a higher salvage lowers the annual charge, and a salvage figure above purchase cost is rejected outright, because it would imply the asset gained value while being used.
References
- IRS Publication 946 — How To Depreciate Property
- IRS — About Form 4562, Depreciation and Amortization
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.