Why your equipment is worth less every year
A delivery van bought for $12,000 will not be worth $12,000 in five years, and your books should not pretend otherwise. Depreciation spreads the cost of a long-lived asset across the years it serves you, which keeps profit figures honest and, in many tax systems, reduces taxable income. Straight-line depreciation is the simplest and most widely used method.
The formula
Formula: straight-line depreciation = (cost - salvage value) / useful life
Subtract what the asset will be worth at the end (salvage value) from what you paid, then divide by the number of years you expect to use it. The result is the depreciation expense per year.
How to use this calculator
- Enter the purchase cost of the asset.
- Enter the estimated salvage value at the end of its useful life.
- Enter the useful life in years.
- Read the yearly depreciation and the book value over time.
Worked example
A bakery buys an oven for $12,000, expects it to last 5 years, and figures it can sell it for $2,000 at the end. Step 1: subtract salvage from cost, 12000 - 2000 = $10,000 of value to spread. Step 2: divide by useful life, 10000 / 5 = $2,000 per year. Each year the oven's book value falls by $2,000: $10,000 after year one, $8,000 after year two, and so on down to $2,000. Related money tools include the margin calculator for pricing the goods the oven bakes, the sales tax calculator for checkout math, and the EBITDA calculator, which adds depreciation back when measuring operating performance.
Practical uses
Accountants use depreciation to match expenses to the revenue the asset helps earn. Business owners use it to plan replacements: when book value nears salvage, start saving for the next oven. Tax filers in many countries deduct depreciation against taxable income each year.
Accountants sometimes pair this method with a depreciation schedule table showing each year's expense, accumulated depreciation, and remaining book value side by side. The table makes the pattern visible at a glance and is the standard attachment for audit files and loan applications involving collateral.
Common mistakes
- Forgetting salvage value. Depreciating the full $12,000 overstates the yearly expense by $400 in our example.
- Guessing the useful life. Five years for an oven is a convention, not physics; check your tax authority's tables or your own repair history.
- Depreciating land. Land does not wear out and is not depreciated under standard accounting.
Limitation
This is an estimate for planning, not financial advice. Straight-line assumes even wear, which suits ovens better than delivery vans, which lose value most quickly in year one. Market value and book value often diverge, especially for technology.