Depreciation is the systematic allocation of an asset's cost over its useful life, reflecting the gradual consumption of the asset's economic value. It is used in accounting to match the expense of using an asset with the revenue it generates.
Straight-Line: Annual Depreciation = (Cost − Salvage Value) / Useful Life
Declining Balance: Depreciation = Book Value × Depreciation Rate
Cost = original purchase price. Salvage Value = estimated residual value at end of useful life. Useful Life = expected years of use. For declining balance, the rate is often 2× the straight-line rate (double declining balance).
Example 1: Machine costs $50,000. Salvage value $5,000. Useful life 5 years. Straight-line method.
Result: $9,000 depreciation per year for 5 years
Example 2: Vehicle costs $30,000. Straight-line rate 20% (5 years). Double declining balance method.
Result: Year 1: $12,000, Year 2: $7,200, Year 3: $4,320 (front-loaded)
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