Business & pricing
Depreciation: Definition, Formula and Example
Depreciation allocates a tangible asset’s depreciable cost over its estimated useful life; it does not directly measure market value or set aside cash.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Allocation of tangible asset cost; Book depreciation.
How it works
Straight-line depreciation allocates equal amounts over full periods. Accelerated methods allocate more in earlier periods. Residual value, useful life, placed-in-service timing and accounting or tax conventions affect the schedule.
Annual straight-line depreciation = (capitalized cost − estimated residual value) / useful life in years
Land is generally not depreciated. Book accounting and tax deductions can follow different methods and timing conventions.
$12,000 equipment with a $2,000 residual value
Assume five full years of straight-line depreciation.
- Depreciable basis: $12,000 − $2,000 = $10,000.
- Annual expense: $10,000/5 = $2,000.
- Book value after one full year: $12,000 − $2,000 = $10,000.
Annual straight-line depreciation is $2,000; ending book value after five full years is $2,000.
Full-year periods; no impairment, revaluation, disposal, tax bonus deduction or change in estimates.
Try these example inputsBook value is not an appraisal
Market prices can move differently from an accounting schedule. A noncash depreciation expense does not mean cash was paid in that year. A generic schedule also does not establish a tax deduction under a specific jurisdiction’s rules.
Explore with a calculator
- Depreciation Calculator
Compare supported book-depreciation methods and explicit partial-period assumptions.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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