Accounting: Fixed Asset Depreciation Methods and Formulas

Depreciation

A method of allocating the cost of a tangible long-term asset over its useful life for accounting and tax purposes.

Amortization

The process of spreading the cost of an intangible asset (e.g., patents, trademarks, copyrights) over its useful life.

Tangible Asset

Physical long-term property, plant, or equipment used in business operations (e.g., laundry machines, kitchen ovens, vehicles, furniture).

Intangible Asset

Non-physical assets that provide long-term value to a company (e.g., patents, trademarks, legal rights).

Net Book Value

The net balance sheet value of a fixed asset, calculated as Original Asset Cost minus Accumulated Depreciation.

Contra-Asset Account

An asset account with a credit balance that offsets a primary asset account (e.g., Accumulated Depreciation offsetting PP&E).

Straight-Line Depreciation

A depreciation method that spreads an asset's cost evenly, recognizing an equal dollar expense for each year of useful life.

Straight-Line Depreciation Formula

(Cost of Fixed Asset - Residual or Scrap Value) / Useful Life of Asset in Years.

Accelerated Depreciation

A depreciation method charging higher depreciation expenses in the early years of an asset's life and lower expenses in later years.

Double Declining Balance (DDB)

An accelerated depreciation method calculated as Beginning Book Value multiplied by a fixed Depreciation Rate.

Double Declining Balance Formula

Depreciation Expense = Book Value at Beginning of Year * Depreciation Rate.

Salvage Value (Scrap / Residual Value)

The estimated residual value or resale worth of an asset at the end of its operational useful life.

Scrap Value Cap Rule

An asset can NEVER be depreciated below its estimated salvage/scrap value under any depreciation method.