Fixed Asset Depreciation

Why is fixed asset depreciation so important? Using fixed assets reduces their value over time. The depreciation of fixed assets is used to allocate cost over their useful life. Businesses calculate fixed assets depreciation for tax and accounting purposes as well as to estimate repair and replacement costs.

There are multiple ways to calculate fixed asset depreciation and capture the value of the assets your business uses. RedBeam fixed asset tracking software offers an easy option for quickly calculating depreciation, so it’s unlikely that you’ll be doing this manually. Regardless, it’s important to have a basic understanding of the most commonly used asset depreciation methods and how to calculate them, because each has a direct effect on your organization’s balance sheet.

Common Depreciation Methods for Fixed Assets

Four common methods of fixed assets depreciation include:

1. Straight-line,
2. 150% declining balance,
3. Double declining balance, and
4. Sum of years’ digits.

Familiarizing yourself with each of these fixed assets depreciation methods can help you and your company make wise, informed fiscal choices.

Straight-Line

Calculate straight-line depreciation by taking the cost of an asset and subtracting the scrap value then dividing by the recovery period in years.] Straight- Line Depreciation Example:

An asset costs \$5,500. It has a scrap value of \$500 and a useful life of five years. Using the straight line fixed asset depreciation formula: Straight-line fixed asset depreciation in each of the five years of the asset’s life would be \$1,000 per year. Divide each year’s depreciation by 12 (months) to arrive at the monthly depreciation in that year.

Straight-LineDepreciation Method
Year 5\$1,000.00
Year 4\$1,000.00
Year 3\$1,000.00
Year 2\$1,000.00
Year 1\$1,000.00

150% Declining Balance

150% declining balance fixed assets depreciation is calculated by first calculating as if using the straight-line method. Dividing one year’s worth of depreciation by the cost of the asset minus the scrap value equals the total percentage of the asset depreciated using the straight-line method in a given year. Multiply this percentage times 150% to get the percentage to be used with 150% declining balance method in the first year. For each of the following years, the same percentage is multiplied by the remaining balance to be depreciated. When the value calculated using the 150% percentage becomes lower than the value using straight-line, revert back to straight-line.

150% Declining Balance Example:

In the straight-line example, the \$5,500 asset with a \$500 salvage value and a 5-year recovery period had a \$1,000 annual depreciation. This represents 20% of the asset’s useful value.

\$1,000 Annual Straight-Line Depreciation/(\$5,500 Cost -\$500 Scrap Value) = 20%

Multiplying 20% by the 150% required by the 150% declining balance method equals 30%. The fixed asset is depreciation rate is 30% or \$1,500 in the first year.

(\$5,500 Cost – \$500 Scrap Value) (30%) = \$1,500

In the second year, the remaining asset value of \$3,500 is multiplied by 30% for a total of \$1,050. This amount is greater than the straight-line amount of \$3,500 divided by the remaining four years of \$875. As long as the 150% declining balance depreciation value is higher than the straight-line depreciation value, the 150% declining balance value is used.

(\$5,500 Cost – \$500 Scrap Value – \$1,500 1st Year’s Depreciation) (30%) = \$1,050

In the third year, the remaining asset value of \$2,450 is multiplied by 30% for a total of \$735. This amount is less than the straight-line amount of \$2,450 divided by the remaining three years of \$816.67. Because the 150% declining balance fixed asset depreciation value is lower than the straight-line depreciation value, the straight-line depreciation value of \$816.67 is used in each of the remaining three years of the assets life. (The final year is \$816.66, due to rounding.)

150% Declining BalanceDepreciation Method
Year 5\$1,050.00
Year 4\$1,050.00
Year 3\$816.67
Year 2\$816.67
Year 1\$816.66

Double Declining Balance

Double declining balance depreciation is calculated by first calculating as if using the straight-line method. Dividing one year’s worth of depreciation by the cost of the asset minus the scrap value equals the total percentage of the fixed asset depreciated using the straight-line method in a given year. Multiply this percentage times 200% to get the percentage to be used with double declining balance in the first year. For each of the following years, that same percentage is multiplied by the remaining balance to be depreciated. When the value calculated using the 200% percentage becomes lower than the value using straight-line, revert back to straight-line.

Double Declining Balance Depreciation Example:

In the straight-line example, the \$5,500 asset with a \$500 salvage value and a five-year recovery period had a \$1,000 annual depreciation. This represents 20% of the asset’s useful value.

\$1,000 Annual Straight-Line Depreciation/(\$5,500 Cost -\$500 Scrap Value) = 20%

Multiplying 20% by the 200% required by the double declining balance method equals 40%. The asset is depreciated by 40% or \$2000 in the first year.

(\$5,500 Cost – \$500 Scrap Value) (40%) = \$2,000

In the second year, the remaining asset value of \$3,000 is multiplied by 40% for a total of \$1,200. This amount is greater than the straight-line amount of \$3,500 divided by the remaining four years of \$875. As long as the double declining balance depreciation value is higher than the straight-line depreciation value, the double declining balance value is used.

(\$5,500 Cost – \$500 Scrap Value – \$2,000 1st Year’s Depreciation) (40%) = \$1,200

In the third year, the remaining asset value of \$1,800 is multiplied by 40% for a total of \$720. This amount is greater than the straight-line amount of \$1,800 divided by the remaining three years of \$600. As long as the double declining balance depreciation value is higher than the straight-line depreciation value, the double declining balance value is used.

(\$5,500 Cost – \$500 Scrap Value – \$2,000 1st Year’s Depreciation – \$1,200 2nd Year’s Depreciation) (40%) = \$720

In the fourth year, the remaining asset value of \$1,080 is multiplied by 40% for a total of \$432. This amount is less than the straight-line amount of \$1,080 divided by the remaining two years of \$540. Because the double declining balance depreciation value is lower than the straight-line depreciation value, the straight-line depreciation value of \$540 is used in each of the remaining two years of the asset’s life.

Double Declining BalanceDepreciation Method
Year 5\$2,000.00
Year 4\$1,200.00
Year 3\$720.00
Year 2\$540.00
Year 1\$540.00

Sum of Years’ Digits

Sum of years’ digits calculates depreciation by first counting the recovery period in years back to one and adding the numbers together.

Sum of Years’ Digits Depreciation Example:

For an asset with a five-year recovery period, the sum of years’ digits is 15.

5 Year Recovery Period = 5 + 4 + 3 + 2 + 1 = 15

The depreciation for a given year is calculated by dividing the year by the sum of years’ digits and multiplying by the cost of the asset minus its scrap value.

Depreciation in year 5: 5/15 or 33.333% x (\$5,500 Cost – \$500 Scrap Value) = \$1,666.67
Depreciation in year 4: 4/15 or 26.667% x (\$5,500 Cost – \$500 Scrap Value) = \$1,333.33
Depreciation in year 3: 3/15 or 20% x (\$5,500 Cost – \$500 Scrap Value) = \$1,000.00
Depreciation in year 2: 2/15 or 13.333% x (\$5,500 Cost – \$500 Scrap Value) = \$666.67
Depreciation in year 1: 1/15 or 6.667% x (\$5,500 Cost – \$500 Scrap Value) = \$333.33
Sum of Year’s DigitsDepreciation Method
Year 5\$1,666,67
Year 4\$1,333,33
Year 3\$1,000.00
Year 2\$666.67
Year 1\$333.33

Fixed Asset Depreciation Method Summary

For comparison, the following table shows a summary of each method’s fixed asset depreciation schedule:

Depreciation MethodStraight-Line150% Declining BalanceDouble Declining BalanceSum of Year’s Digits
Year 5\$1,000.00\$1,050.00\$2,000.00\$1,666,67
Year 4\$1,000.00\$1,050.00\$1,200.00\$1,333,33
Year 3\$1,000.00\$816.67\$720.00\$1,000.00
Year 2\$1,000.00\$816.67\$540.00\$666.67
Year 1\$1,000.00\$816.66\$540.00\$333.33

Beyond Fixed Asset Depreciation

If you want to calculate fixed asset depreciation quickly and easily? RedBeam Asset Tracking can help you calculate the depreciation of your fixed assets at the click of a button. Simply choose from the following methods: straight-line, 150% declining balance, double declining balance, and sum of years’ digits. You can also choose from monthly and annual depreciation periods and report on the remaining value of assets as of a particular date or the amount they have depreciated by date range.