The same cost, three rhythms of spreading it
You already know the shape of the problem from capitalising. A long-lived asset is paid for once but *used up* across many years, so its cost has to be released into expense gradually — that release is depreciation. What the previous guide left open is the *pattern* of release. The total spread over the asset's life never changes: you can never depreciate more than depreciable cost, which is the purchase cost minus the salvage value you expect to recover at the end. The methods differ only in *timing* — how much of that fixed total you recognise in each year.
To keep the comparison honest, we will run the *same* asset through all three methods. Imagine a small printing press: it costs 100,000, you expect to use it for 5 years, and at the end you think you can sell it for scrap at 10,000. So the depreciable cost is 90,000, the useful life is 5 years, and the salvage value is 10,000. Every method below must, by the end of year 5, have written this press down to exactly its 10,000 salvage value — no method ever drives book value below salvage. The journey there is what differs.
Straight-line: the same slice every year
The simplest and by far the most common method is straight-line depreciation: take the depreciable cost and divide it evenly across the years of life. For our press, that is 90,000 spread over 5 years, or 18,000 of straight-line depreciation expense every single year. The press loses 18,000 of book value in year 1, another 18,000 in year 2, and so on, marching down in equal steps from 100,000 toward 10,000. A child could draw the line — it is, literally, a straight one.
Straight-line earns its dominance honestly. It is easy to compute, easy to audit, and it suits the many assets that give roughly even service across their lives — an office building, furniture, a fence. Its quiet assumption is exactly that *evenness*: that the asset is just as useful, and wears at the same rate, in its tired old age as in its first bright year. When that assumption fits, straight-line is not a simplification — it is the truth. When it does not, the next two methods exist precisely to tell a more faithful story.
Units of production: depreciation that follows the work
Some assets do not wear by the calendar — they wear by *use*. A press that runs flat-out wears faster than one that sits idle; a truck dies by the mile, not by the month. For these, units-of-production depreciation ties the expense to actual output. You first find a rate per unit: depreciable cost divided by the total units the asset is expected to produce over its whole life. Then each year's expense is simply that rate times the units it actually produced. A busy year carries a big slice of cost; a quiet year carries a small one.
Say our press is rated for 900,000 printed sheets over its life. The rate is 90,000 of depreciable cost over 900,000 sheets, or 0.10 of units-of-production depreciation per sheet. Print 200,000 sheets in a hot first year and the expense is 20,000; print only 100,000 in a slow year and it is 10,000. The beauty is the tight matching: the cost of the machine lands in the very periods it earned revenue. The catch is that you must *measure* output reliably, which is easy for sheets or miles but meaningless for a building. And the total is still capped — once 900,000 sheets are printed, the press is fully depreciated and you stop, even if it keeps running.
Double-declining-balance: load the cost up front
Many assets lose most of their value early — a new laptop, a delivery vehicle, anything that becomes obsolete or unreliable fast. For these, an *accelerated* method matches reality better: heavy expense in the early years, lighter later. The most common is double-declining-balance depreciation. It does two things that feel strange at first. It works off *book value*, not depreciable cost — and it *ignores salvage* in the formula until the very end. Each year you multiply the asset's current book value by a fixed rate: double the straight-line rate. With a 5-year life, straight-line is 20% per year, so the double-declining rate is 40%.
Walk our press through it. Year 1: 40% of 100,000 book value is 40,000 of double-declining-balance depreciation — more than twice the straight-line slice. Year 2: 40% of the *new* 60,000 book value is 24,000. Year 3: 40% of 36,000 is 14,400. The expense shrinks every year because the base it bites into keeps shrinking. But notice the danger: the formula ignored salvage, so it would happily depreciate the press below 10,000 if left unchecked. So a hard rule guards the floor — you stop the moment book value reaches salvage, and the last year's expense is just whatever brings book value exactly to 10,000, not a penny more.
Same press: cost 100,000, salvage 10,000, life 5 yrs
Depreciable cost = 90,000. Annual expense by method:
Year | Straight-line | Units (sheets) | Double-declining (40%)
-----+---------------+----------------+-----------------------
1 | 18,000 | 20,000 (200k) | 40,000
2 | 18,000 | 18,000 (180k) | 24,000
3 | 18,000 | 22,000 (220k) | 14,400
4 | 18,000 | 16,000 (160k) | 8,640
5 | 18,000 | 14,000 (140k) | 2,960 <- plug to floor
-----+---------------+----------------+-----------------------
total| 90,000 | 90,000 | 90,000
All three remove exactly 90,000 over the life. Only the
timing differs. Ending book value is 10,000 in every column.How the choice reshapes reported income
Look back at year 1 in the table. Straight-line charges 18,000 of expense; double-declining charges 40,000. That 22,000 gap flows straight down the income statement — the double-declining company reports 22,000 *less* profit in year 1, all else equal. But in the later years the picture flips: by year 5, double-declining charges only 2,960 while straight-line still charges 18,000, so now the accelerated company reports *higher* profit. Accelerated methods do not destroy income; they *shift* it, pulling expense into the early years and leaving the later years lighter.
Here is the honesty that matters most: none of this touches cash. The company paid 100,000 for the press on day one and never pays again; depreciation is a pure bookkeeping allocation of that one outlay. Whichever method you pick, the same 90,000 leaves the income statement over five years and the same 100,000 left the bank account once. So a method that lowers this year's profit does *not* make the company poorer — it is, as you learned earlier, a vivid case of profit not being cash. This is also why the cash flow statement's indirect method adds depreciation straight back: it was an expense that never cost a cent this period.
Choosing, and what never changes
So which method should a business use? The guiding principle is to match the pattern of expense to the pattern in which the asset actually delivers value. Use straight-line when the asset serves evenly — buildings, furniture, fixtures. Use units of production when wear tracks measurable output and that output swings year to year — a machine paid per part, a vehicle paid per mile. Use double-declining-balance when the asset is most productive young and fades or goes obsolete fast — technology, vehicles, equipment in harsh use. The method should be chosen for fit, then applied consistently year after year so statements stay comparable.
Whatever the method, three things never change and are worth fixing in memory. The journal entry is always identical in shape — debit depreciation expense, credit accumulated depreciation — only the *amount* differs. The total depreciated over the life is always the same depreciable cost, so the methods are timing choices, not size choices. And book value always ends at salvage value, never below it. The method is the path; the destination is fixed. Master that and you can read any depreciation schedule a company puts in front of you.