Start your business
Start your business
Run your business
Run your business
Grow your business
Grow your business
Accountants and Bookkeepers
Accountants and Bookkeepers
- Accountants and Bookkeepers
  Learn how accountants and bookkeepers can be productive in these articles & guides
- Learning and Development
  A range of informative content to enhance your QuickBooks experience.
Updates
Updates
- Product Updates
  Watch this space for monthly product updates.
- Intuit News
  Latest news, articles & guides

Need help choosing a plan?

1800 917 771 Schedule a call

Schedule call

Five stacks of coins decreasing in size to demonstrate depreciation

What are the different types of depreciation methods?

June 14, 2023

Depreciation is the accounting process of allocating the original costs of fixed assets such as plant and machinery and equipment over the course of their useful life. It refers to the decline in the value of fixed assets due to their usage or obsolescence or the passage of time. Furthermore, depreciation is a non-cash expense, as it does not involve any outflow of cash. Hence, depreciation as an expense is different from all the other conventional expenses.

However, there are different factors a company must consider in order to calculate depreciation. One such factor is the depreciation method. Companies use different methods in order to calculate depreciation.

Let’s discuss the different types of depreciation methods and then look at a depreciation example.

The various depreciation methods

Various methods are used by the companies to calculate depreciation. These are as follows:

Types of depreciation methods

Straight line (prime cost) depreciation method
Diminishing value method
Sum of years’ digits method
Double declining balance method
Sinking fund method
Annuity method
Insurance policy method
Discounted cash flow method
Use-based method
Output method
Working hours method
Mileage method
Depletion method
Revaluation method
Group or composite method.

NEW!

FREE Business Health Check

Find out how your business is performing. Complete this short questionnaire to receive a free personalised Business Health Check report!

Let’s go!

1. Straight line depreciation method

This is the most commonly used method to calculate depreciation. It is also known as the fixed instalment method. Under this method, an equal amount is charged for depreciation of every fixed asset in each accounting period. This uniform amount is charged until the asset value is reduced to nil or to its salvage value at the end of its estimated useful life.

This method derives its name from a straight line graph. This graph is created from plotting an equal amount of depreciation for each accounting period over the useful life of the asset.

Thus, the amount of depreciation is calculated by dividing the difference between the original cost or book value of the fixed asset and its salvage value by the useful life of the asset.

Straight-line depreciation formula

The formula for annual depreciation under the straight line method is as follows:

Annual depreciation expense = (cost of an asset – salvage value) / useful life of an asset

Where,

The cost of the asset is the purchase price or historical cost.
The salvage value is value of the asset remaining after its useful life
The useful life of the asset is the number of years for which an asset is expected to be used by the business.

2. Diminishing value method

This method is also known as the reducing balance method, the written-down value method or the declining balance method. A fixed percentage of depreciation is charged in each accounting period to the net balance of the fixed asset under this method. This net balance is the value of the asset that remains after deducting the accumulated depreciation.

This means that the depreciation rate is charged to the diminishing value of the asset. This asset is reflected in the books of accounts at the beginning of an accounting period. So, the book value of the asset is written down so as to reduce it to its residual value.

As the book value of the asset reduces every year, so does the amount of depreciation, so a higher amount of depreciation is charged during the early years of the asset as compared to the later stages.

Thus, the method is based on the assumption that more depreciation should be charged in the early years of the asset. This is on account of the low repair cost being incurred in these years. As an asset moves into the later stages of its useful life, the cost of repairs and maintenance of the asset increase. Hence, a smaller amount of depreciation needs to be provided for during these years.

Diminishing value method formula

Depreciation expense = (book value of the asset at the beginning of the year x rate of depreciation) / 100

Grow Your Business with QuickBooks

30-day free trial

Buy now and save

3. Sum of years’ digits method

Another accelerated depreciation method is the sum of years’ digits method. This method recognises depreciation at an accelerated rate. Thus, the depreciable amount of an asset is charged to a fraction over different accounting periods under this method.

This fraction is the ratio between the remaining useful life of an asset in a particular period and sum of the years’ digits. Thus, this fraction indicates that the capital blocked or the benefit derived out of the asset is the highest in the first year.

As an asset moves towards the end of its useful life, the benefit gained from the asset declines. That is to say, the highest amount of depreciation is allocated in the first year since no capital has been recovered at that point. The least amount of depreciation should be charged in the last year, as the major portion of capital invested has been recovered.

Sum of years’ digits depreciation formula

The formula for the sum of years’ digits method is as follows:

Depreciation expense = depreciable cost x (remaining useful life of the asset / sum of the years’ digits)

Where depreciable cost = cost of asset – salvage value

Sum of the years’ digits = (n(n +1)) / 2 (where n = useful life of an asset)

4. Double declining balance method

This method is a mix of the straight line and diminishing value methods. Under this method, depreciation is charged on the reduced value of the fixed asset at the beginning of the year. This is just like the diminishing value method, except a fixed rate of depreciation is applied just as in the case of the straight line method. This rate of depreciation is twice the rate charged under the straight line method. Thus, this method leads to an over-depreciated asset at the end of its useful life as compared to the anticipated salvage value.

Companies adopt various approaches in order to overcome challenges like this. For one, the amount of depreciation charged for the last year is adjusted. This is done to make the salvage value equal to the anticipated salvage value. For another, many companies choose to use the straight line depreciation method in the last year to adjust the over-depreciated salvage value.

Double declining balance formula

Annual depreciation expense = 2 x (cost of an asset – salvage value) / useful life of an asset.

Depreciation expense = 2 x cost of the asset x depreciation rate.

Depreciation calculation example

Kapoor Pty Ltd purchased machinery worth $100,000 on 31 March 31 2018. However, in 2018 a new variant of the same machinery comes onto the market due to innovation in technology. As a consequence, the machinery purchased by Kapoor Pty Ltd becomes outdated. This technological innovation causes the value of the old machinery to decline. Say the profit before depreciation and tax for Kapoor Pty. Ltd for the year ended December 2018 is $50,000, and depreciation for the same accounting period is $10,000. The depreciation for plant and machinery is shown as:

Profit before depreciation and tax: $50,000.

(-) Depreciation: $10,000.

Profit before tax: $40,000.

Also Read: A small business owner’s guide to tax depreciation

Factors for estimating depreciation

There are various factors that need to be considered in order to calculate the amount of depreciation to be charged in each accounting period. These include:

Cost of the asset

The cost of the asset is also known as the historical cost. It comprises the purchase price of the fixed asset and the other costs incurred to put the asset into working condition. These costs include freight and transportation, installation cost, commission, insurance, etc.

Salvage value

The salvage value is also known as the net residual value or scrap value. It is the estimated net realisable value of an asset at the end of its useful life. This value is determined as a result of the difference between the sale price and the expenses necessary to dispose of an asset.

Estimated useful life

The commercial or economic life of an asset is called the useful life of an asset. When the useful life of an asset is estimated, its physical life is not taken into consideration. This is because an asset might be in good physical condition after a few years but it may not be useful for production purposes.

Method of depreciation

You need to determine a suitable way to allocate the cost of the asset over the periods during which the asset is used. Generally, the method of depreciation to be used depends upon the patterns of expected benefits obtainable from a given asset. This means that different methods will apply to different types of assets in a company.

However, in reality, companies do not think about the service benefit patterns when selecting a depreciation method. In general, only a single method is applied to all of the company’s depreciable assets.

Main differences between bookkeeping and accounting

Growing a business

Bookkeeping vs accounting: What’s the difference?

June 1, 2023

Running a business

What is depreciation and how is it calculated?

April 15, 2021

taxes

What is Tax Depreciation? A small business owner’s guide to tax depreciation

May 2, 2024

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

See how it works

Help Me Choose

Use our product selector to find the best accounting software for you.

Choose your product

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.

Start learning

Stay up-to-date with the latest small business insights and trends!

Want more? Visit our tools and templates!

First Name*

Email*

What best describes you?*

By signing up you are agreeing to our terms and privacy policy.

- - QuickBooks reserves the right to change pricing, features, support and service at any time. Prices are in AUD and include GST. See our Terms of Service for further information.
  - Pricing: All prices are in AUD and include GST.
  - ProAdvisor Program: Please find the terms of our ProAdvisor program here.
  - 75% off for 6 months: For new subscribers, enjoy a 75% discount off the current monthly retail price for QuickBooks Self-Employed, QuickBooks Online Simple Start, QuickBooks Online Essentials or QuickBooks Online Plus for the first 6 months of your subscription (Offer). The discount will applied from the date of your enrolment and will continue for 6 months. From month 7, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - 50% off for 12 months: For new subscribers, enjoy a 50% discount off the current monthly retail price for QuickBooks Self-Employed, QuickBooks Online Simple Start, QuickBooks Online Essentials or QuickBooks Online Plus for the first 12 months of your subscription (Offer). The discount will applied from the date of your enrolment and will continue for 12 months. From month 13, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - 30% off for 3 months (Advanced): For new subscribers to QuickBooks Online Advanced, enjoy a 30% discount off the current monthly retail price for the first 3 months of your subscription (Offer). The discount will apply from the date of your enrolment and will continue for 3 months. From month 4, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - 30% off for 12 months (Advanced): For new subscribers to QuickBooks Online Advanced, enjoy a 30% discount off the current monthly retail price for the first 12 months of your subscription (Offer). The discount will apply from the date of your enrolment and will continue for 12 months. From month 13, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - 30% off for 3 months (existing subscribers): For existing QuickBooks subscribers who upgrade to QuickBooks Online Essentials, Plus or Advanced, enjoy a 30% discount off the current monthly retail price for 3 months of your subscription (Offer). The discount will be applied from the date you upgrade in-product and will continue for 3 months. From month 4, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time services and prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - Free Trial: First thirty (30) days of subscription to QuickBooks Online, QuickBooks Self-Employed and QuickBooks Payroll (including QuickBooks Advanced Payroll), starting from the date of enrolment, is free. During the free trial, you may pay any number of employees using QuickBooks Payroll free of charge. To continue using QuickBooks after your 30-day trial, you'll be asked to present a valid credit card for authorisation and you'll be charged monthly at the then-current fee for the service(s) you've selected.
  - QuickBooks Payroll powered by Employment Hero: Payroll services are offered by a third party, Employment Hero. QuickBooks Payroll is only accessible via QuickBooks Online subscriptions. You will be charged $5.00 (incl. GST) per month for each ‘active employee’ paid using QuickBooks Payroll. An ‘active employee’ is one who has been paid at least once in the billing month. For Advanced Payroll, there is an additional monthly subscription fee of $10 (incl GST). Pricing, terms and conditions, including service options, are subject to change.
  * Employment Hero was voted the leading payroll solution for SMBs <50 employees (Australian Payroll Association 2021 Payroll Benchmarking Study)
  - Customer support: Call or chat to an expert for QuickBooks Online Accountant, QuickBooks Simple Start, Essential, Plus, and Advanced or use in-product QB Assistant and chat for QuickBooks Self-Employed. You'll also find useful resources in the QuickBooks Community.
  - Compatible Devices: QuickBooks Online, QuickBooks Self-Employed and QuickBooks Payroll require a computer with Internet Explorer 10, Firefox, Chrome, or Safari 6 and an Internet connection (a high-speed connection is recommended). The QuickBooks Online mobile app works with iPhone, iPad, and Android phones and tablets. QuickBooks Online and QuickBooks Payroll are accessible on mobile browsers on iOS, Android, and Blackberry mobile devices. Devices sold separately; data plan required. QuickBooks Payroll cannot be used on the mobile apps. Not all features are available on the mobile apps and mobile browser. QuickBooks Online mobile access is included with your QuickBooks Online subscription at no additional cost. Data access is subject to cellular/internet provider network availability and occasional downtime due to system and server maintenance and events beyond your control. Product registration required.
  - Get paid faster: Get paid 2.5x faster invoicing with PayPal
  * PayPal and QuickBooks customers get paid on average in less than 5 days, which is over 7 days faster than the average for invoices that get paid with other payment methods. Data is for paid invoices that were created in QuickBooks in Australia between 23.05.22 and 23.11.22
  - Tax deductions: Tax deductions not guaranteed due to being subject to user data entry errors. Mileage calculation provided by the Australia Taxation Office - 85 cents per kilometre for the 2023-2024 income year. To a maximum of 5,000 business kilometres per car (Deductions are only applicable to cars)
  - Customer Service Awards: Excellence in Customer Service Award at the CX Australia Awards 2022
  - Multiple file discount: Multiple file discount applies to QuickBooks Australia customers only and valid when signing up for more than one QuickBooks Online subscription in one order. Further terms and conditions available here. Not applicable to QuickBooks Self Employed.
  - Reviews: GetApp, Capterra, Google Play Store, Apple App Store reviews as at date 08/01/24.
  - Cost per day claim: Based on a QuickBooks Simple Start Plan at its regular retail price of $25 per month and a 31 day month.
  - Cost per day claim (annual): Based on a QuickBooks Simple Start Plan at its regular retail price of $270 per year and a 365 day year.
  - Annual Billing: You may pay for your QuickBooks Online subscription on an annual, upfront basis to enjoy a discount on the current fees. If you use QuickBooks Payroll powered by Employment Hero, your payroll costs will still be charged monthly to your nominated payment method in accordance with your usage as set out here. If you cancel your QuickBooks Online subscription within the pre-paid 12 month period, you will not be eligible for a refund, but will retain full access to your QuickBooks Online subscription for the remainder of the 12-month period. Unless cancelled by you prior, your annual subscription will auto-renew on the 12 month anniversary of your sign-up date using the billing details you have given us. Discounts, prices, terms and conditions are subject to change.
  - Over 7 million customers: Based on number of global QB customers (ecosystem) (7.1m) worldwide as of October 2022.
  - Free Onboarding: Applicable to Buy Now subscriptions on QuickBooks Simple Start, Essentials and Plus plans. Not available for QuickBooks Self-Employed.
  - Save Hours: Save up to an average of 29 hours per month with QuickBooks.
  - * Based on a survey conducted by Intuit Australia Pty Ltd in September 2022. Time saving is in comparison to previous accounting method, based on 184 responses from customers that saw time savings.
  - Get access to QuickBooks Tax: ***Access QuickBooks Tax, powered by LodgeiT, by becoming a member of the QuickBooks ProAdvisor Program (it’s free to join). Find out more about the ProAdvisor Program here, including the terms of the QuickBooks Tax offer in the Program here.
  - QuickBooks Time Disclaimers & Offers for Australia: For Important pricing offers and disclaimers with further information, please see here.
  - *Full terms and conditions for access to QuickBooks Tax, powered by LodgeiT as part of the the Proadvisor Program can be found here. QuickBooks reserves the right to change pricing, features, support and service at any time.
  - **Intuit conducted a study involving 56 interviews with accountants and bookkeepers who used Books Review for BAS preparation between March to December 2021 and found that when using Books Review, participants reduced the time spent preparing their clients BAS Reports by around 40%.
  - Our Terms of Service apply to all QuickBooks Online subscriptions. Please review them carefully.