Depreciation calculator (straight-line method)

This calculator can be used to calculate the depreciation expense of an asset over its useful life using the straight-line method. The straight-line method evenly spreads the cost of an asset over its expected useful lifespan.

Page written by Ian Hawkins. Last reviewed on July 16, 2024. Next review due April 1, 2025.

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This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.

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Depreciation methods explained

Straight-line depreciation
- Simple and widely used method
- Spreads the cost evenly over the asset’s useful life
- Suitable for assets with consistent utility over time
Declining balance depreciation
- Accelerated method with higher expenses in early years
- Reflects faster wear and tear of certain assets
- Common for technology and vehicles
Units of production depreciation
- Based on usage or output
- Ideal for manufacturing equipment or vehicles
- Matches expense with actual asset usage

How to calculate depreciation (straight-line method)

Here’s how you can calculate depreciation using the straight-line method:

Determine the cost of the asset.
Estimate the salvage value (the value of the asset at the end of its useful life).
Calculate the depreciable cost by subtracting the salvage value from the cost of the asset: Depreciable Cost = Cost of asset – salvage value.
Determine the useful life of the asset in years.
Divide the depreciable cost by the useful life to calculate the annual depreciation expense: Annual depreciation expense = depreciable cost / useful life.

A depreciation calculator using the straight-line method typically requires you to input the cost of the asset, salvage value, and useful life. The calculator then provides you with the annual depreciation expense.

Using this method, the asset’s value is reduced by the same amount each year, providing a systematic way to account for the reduction in value over time. This is a common method used in accounting to allocate the cost of assets and determine their book value.

Does depreciation impact on canadian taxes and financial statements?

Depreciation is a non-cash expense that reduces taxable income, thereby lowering tax liabilities. It’s recorded on the income statement and reduces the book value of assets on the balance sheet. Capital cost allowance (CCA), Canada revenue agency (CRA) allows businesses to claim cca as a tax deduction, which is similar to depreciation. Hence:

Lower taxable income: Depreciation reduces your taxable income, which can lower your overall tax burden.
CCA classes and rates: Familiarize yourself with the CCA classes and their rates. For example, class 8 (general-purpose machinery and equipment) has a cca rate of 20%, while class 10 (automobiles) has a rate of 30%.

FAQs

What is depreciation?

In simple words, depreciation is the allocation of the cost of an asset over its useful life.

Why is depreciation important?

Accurate financial reporting

Reflects true asset value: depreciation helps businesses accurately report the value of their assets over time. without accounting for depreciation, assets would remain on the balance sheet at their original cost, which can be misleading.
Matches expenses with revenue: by spreading the cost of an asset over its useful life, depreciation ensures that expenses are matched with the revenue generated by the asset. this adherence to the matching principle provides a more accurate picture of a company’s profitability.

Tax benefits

Reduces taxable income: depreciation is a non-cash expense that reduces the taxable income of a business. by lowering taxable income, businesses can decrease their tax liabilities, which can result in significant tax savings.
Capital cost allowance (CAA): in Canada, businesses can claim capital cost allowance (CAA) on their tax returns. the cra allows businesses to deduct a portion of the cost of capital assets each year, reducing the amount of taxable income.

Better financial planning

Budgeting for asset replacement: understanding how an asset depreciates helps businesses plan for future capital expenditures. knowing when an asset will need to be replaced allows for better budgeting and financial planning.
Cash flow management: by accounting for depreciation, businesses can better manage their cash flow. it helps in planning for the maintenance, repair, or replacement of assets, ensuring that funds are available when needed.

Improved business decisions

investment analysis: depreciation provides insight into the wear and tear of assets, helping businesses make informed decisions about maintaining or replacing them. this analysis is crucial for long-term investment planning.
Loan and financing applications: lenders often look at a company's depreciation schedule to understand the value and condition of its assets. a well-managed depreciation strategy can improve the chances of securing loans and financing.

Compliance and transparency

Regulatory compliance: accurately reporting depreciation is essential for complying with Canadian accounting standards and regulations. businesses must follow these standards to ensure their financial statements are reliable and transparent.
Stakeholder trust: providing a true and fair view of a company's financial health builds trust with stakeholders, including investors, lenders, and regulators. transparent financial reporting, including proper depreciation accounting, enhances credibility.

Enhanced financial ratios

Return on assets (ROA): depreciation impacts financial ratios like return on assets. by accounting for depreciation, businesses can get a more accurate measure of their performance and efficiency.
Debt-to-equity ratio: properly depreciated assets affect the debt-to-equity ratio, providing a clearer picture of a company's financial leverage and stability.

And so much more!

How does the CRA handle depreciation

The cra uses the capital cost allowance (cca) system, which categorizes assets and assigns specific rates.