Under U.S. GAAP, four depreciation methods are permitted for tangible long-lived assets: straight-line, double declining balance, sum-of-the-years’ digits, and units of production. GAAP doesn’t rank them. Management picks the method that best reflects the pattern in which the asset’s economic benefits are consumed, then applies it consistently. Below is how each of the depreciation methods allowed by GAAP works, when it fits, and how to handle changes and disclosures.
Straight-Line Depreciation
Straight-line is the most common method in practice and the simplest. It spreads the depreciable cost evenly across every year of the asset’s useful life. Take the asset’s cost, subtract estimated salvage value, and divide by the number of years you plan to use it.
A machine that costs $100,000 with a $10,000 salvage value and a ten-year useful life produces $9,000 of depreciation expense every year. Cost includes everything spent to get the asset ready for use, including shipping, installation, and testing. Salvage value is the best estimate of what the asset will fetch when retired.
Straight-line works well for assets that deliver roughly the same benefit year after year: office furniture, buildings, standard computer equipment. The even expense pattern also makes income statements more predictable, which is why many companies default to it when no other method clearly fits better.
Double Declining Balance
Double declining balance (DDB) is an accelerated method. It takes the straight-line rate, doubles it, and applies that rate to the asset’s remaining book value each year. For a five-year asset, the straight-line rate is 20 percent, so the DDB rate is 40 percent. For a ten-year asset, the DDB rate is 20 percent.
One quirk: you don’t subtract salvage value when calculating annual depreciation. You multiply the accelerated rate by whatever book value remains at the start of each year. Because you’re always taking a percentage of a shrinking number, the expense drops every year. But book value can never fall below salvage value. In practice, you’ll eventually record a plug figure in the final year that brings book value exactly to salvage.
Take a $50,000 asset with a $5,000 salvage value and a five-year life. Year one expense is $20,000 (40 percent of $50,000), leaving book value of $30,000. Year two is $12,000 (40 percent of $30,000), leaving $18,000. The pattern continues until the math would push book value below $5,000, at which point you record only the amount needed to hit that floor.
DDB fits assets that lose productive value quickly, such as technology hardware that becomes obsolete or vehicles that need more repairs as they age.
Sum-of-the-Years’ Digits
Sum-of-the-years’ digits (SYD) is a gentler form of acceleration. Unlike DDB, SYD applies a declining fraction to the asset’s depreciable cost (cost minus salvage value) rather than to remaining book value.
Build the fraction by adding the digits of the asset’s useful life. For a five-year asset: 5 + 4 + 3 + 2 + 1 = 15. That sum is the denominator. The numerator is the number of years remaining at the start of each period. Year one is 5/15, year two is 4/15, year three is 3/15, and so on. Each fraction multiplies the same depreciable base.
For a $100,000 asset with a $10,000 salvage value and a five-year life, year one expense is $30,000 (5/15 × $90,000), year two is $24,000 (4/15 × $90,000), and it tapers from there. SYD produces a smoother decline than DDB. Useful when you want some acceleration without the dramatic early-year spike.
Units of Production
Units of production ties depreciation directly to how much an asset is actually used. Instead of spreading cost over time, you spread it over the total output or activity expected from the asset. This is the right choice when wear depends on volume rather than age.
First, calculate a per-unit rate: (cost minus salvage value) divided by total estimated lifetime output. Then multiply that rate by the units actually produced in the period. A printing press that costs $500,000, has a $50,000 salvage value, and can produce 5 million pages has a rate of $0.09 per page. If it prints 200,000 pages in a quarter, that quarter’s depreciation expense is $18,000.
The expense fluctuates with production. A quarter where the press sits idle produces zero depreciation. A quarter with heavy output produces more. That’s why the method is popular in manufacturing and mining, where utilization varies dramatically from period to period. The same concept applies to natural resources: when a mining company extracts ore or a timber company harvests trees, the cost of the resource is allocated based on units extracted. Accountants call this depletion, but the underlying math is identical.
Choosing the Right Method
GAAP requires management to pick the method that best reflects the pattern in which the asset’s economic benefits are consumed. That’s the whole test. A fleet of delivery vehicles that lose capability steadily over time might warrant straight-line. A technology asset that becomes obsolete quickly might justify DDB. A piece of mining equipment whose value correlates to tonnage extracted calls for units of production.
Once you’ve chosen a method for a class of assets, apply it consistently in each subsequent period so financial statements remain comparable year to year. The financial statement notes must disclose the major classes of depreciable assets, the depreciation method used for each class, total depreciation expense for the period, and accumulated depreciation balances.
When Depreciation Starts
Depreciation begins when the asset is available for its intended use, meaning it’s in the location and condition needed to operate the way management intends. You don’t wait for actual production to start. If a machine is installed, tested, and ready to run on March 15 but production doesn’t begin until April 10, depreciation starts in March.
Because assets rarely arrive on the first day of a fiscal year, companies need a convention for partial periods. Common ones include the half-year convention (half a year of depreciation in the first and last year), the mid-month convention (half a month in the month placed in service), and an actual-days approach. The convention you pick is a policy choice and should be applied consistently.
Assets That Aren’t Depreciated
Not every long-lived asset gets depreciated. Land is the main exception. Because land has an indefinite useful life, its cost stays on the balance sheet without any periodic expense. Improvements to land, such as parking lots, fences, driveways, and outdoor lighting, do have finite lives and are depreciated separately from the land itself.
Construction in progress is another non-depreciable category. While a building or production line is being built, costs accumulate in an asset account but depreciation doesn’t begin until the project is substantially complete and ready for use. Once that threshold is crossed, the accumulated cost moves into a depreciable asset class and the clock starts.
Changing a Method or Estimate
Estimates change. If you revise an asset’s useful life or salvage value partway through its service, GAAP treats this as a change in accounting estimate. You don’t restate prior periods. You spread the remaining depreciable amount over the revised remaining life going forward.
A change in the depreciation method itself, such as switching from DDB to straight-line, is also handled prospectively under current standards. GAAP treats a method change as inseparable from a change in the estimate of how benefits are consumed, so no restatement of prior years is required and no preferability letter is needed from the auditor.
Component Depreciation
Companies can depreciate significant components of a single asset separately when those components have different useful lives. A building’s roof, HVAC system, and structural shell might each get their own depreciation schedule. Component depreciation is permitted under GAAP but not required. It adds complexity, so it tends to show up at larger companies and in capital-intensive industries like utilities and airlines.
GAAP Depreciation Is Not Tax Depreciation
The four methods above apply to financial reporting. Tax returns use a separate system: the Modified Accelerated Cost Recovery System (MACRS), with fixed property classes, statutory recovery periods, and options like bonus depreciation and Section 179 expensing.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System2Internal Revenue Service. Publication 946 – How To Depreciate Property MACRS classes don’t have to match an asset’s actual useful life, and the accelerated tax deductions often diverge sharply from GAAP expense in early years. Those tax rules don’t change what you can use on the books. GAAP still gives you the same four choices, applied to the pattern of economic benefit.