Depreciation is the process of allocating the cost of an asset over its service life. There are several methods of calculating depreciation. Depreciation can be calculated one way for tax purposes and another for financial purposes.

Straight‑line depreciation allocates the asset cost evenly over its service life. The formula for straight‑line depreciation is:

Declining balance is an accelerated method that provides higher depreciation charges in the earlier years of the asset life and lower depreciation charges in the later years.

The annual depreciation is calculated by using a constant depreciation percentage rate and multiplying it by the remaining net book value each year of the asset service life.

Each year the net book value is calculated with the following formula:

With the declining‑balance method, $3,361 ($4,802 ‑ $1,441) of the asset cost is not depreciated. This amount is used to calculate a gain or loss at the time of retirement.

The standard declining‑balance method does not depreciate the asset to zero. You can choose to switch the declining‑balance method to the straight‑line method when the depreciation calculated by the straight‑line method is greater than the depreciation calculated by the declining‑balance method. This method fully depreciates the asset.

When you specify the switch to straight‑line method, the system uses a different calculation than for the standard straight-line method.

The system performs this calculation every year to compare the results against the declining balance. When the straight-line method yields higher annual depreciation, the calculation is switched.

Declining‑Balance Switch to Straight‑Line Depreciation Schedule illustrates the depreciation charges for declining‑balance and straight‑line methods.

In year 3, the declining‑balance depreciation charge is less than the straight‑line depreciation charge. Therefore, the straight-line method will be used for the remaining years.

Sum of the years’ digits is an accelerated method that provides a decreasing fraction to the asset depreciable basis.

The annual depreciation is calculated by applying a fraction to the asset depreciable basis. Each fraction uses the sum of the years’ digits as the denominator and the remaining years in the asset service life as the numerator. The numerator decreases each year while the denominator remains constant.

Sum‑of‑the‑Years’‑Digits Depreciation Schedule illustrates the sum‑of‑the‑years’‑digits depreciation schedule.

Flat rate calculates depreciation by using a constant percentage and multiplying it by the depreciable basis over the asset service life until the sum of the depreciation is greater than the basis amount. At this time, the final year of depreciation is adjusted so that the total of depreciation equals the basis amount.

The formula for flat‑rate depreciation is:

Flat‑Rate Depreciation Schedule illustrates the flat‑rate depreciation schedule.

In year 5, the accumulated depreciation exceeds the asset depreciable basis. The depreciation charge is adjusted in year 5.

The units of production (UOP) method calculates depreciation based on items produced or units consumed from the asset. The formulas for units of production are:

Units‑of-Production Depreciation Schedule illustrates the units‑of‑production depreciation schedule for 5 years.

You can substitute custom depreciation tables for the standard depreciation methods for calculating depreciation. Depreciation is calculated by specifying a depreciation factor for each period and year of the asset life. The depreciation factors are user‑defined and must equal 100% at the end of the asset service life.

The formulas for custom table are:

Custom‑Table Depreciation Schedule illustrates the custom‑table depreciation schedule.