In more detail
With straight-line depreciation, the cost minus the expected salvage value is spread evenly over the useful life. Declining-balance methods apply a fixed percentage to the remaining book value each year, so they take more in the early years; double-declining balance uses twice the straight-line rate. Book value never drops below the salvage value. Tax rules often prescribe their own schedules, which can differ from the ones used in a company's accounts.
Why it matters
For a business, depreciation turns a large purchase into yearly expenses that reduce reported profit and often taxable income. For a car owner, real-world depreciation is usually the largest cost of ownership in the first years, which matters when choosing a loan term or a lease.
Example
A $30,000 vehicle expected to be worth $6,000 after 5 years. Straight line: (30,000 − 6,000) / 5 = $4,800 a year. Double-declining balance (40% a year):
| Year | Depreciation | Book value |
|---|---|---|
| 1 | $12,000 | $18,000 |
| 2 | $7,200 | $10,800 |
| 3 | $4,320 | $6,480 |
| 4 | $480 | $6,000 |
| 5 | $0 | $6,000 |
Year 4 is capped so book value stops at the salvage value.
Common confusion
Amortization is the same idea for intangible assets, and also the word for repaying a loan in instalments.