Depreciation Methods Compared: Straight-Line, Declining-Balance, Units-of-Production, and Sum-of-the-Years'-Digits

Your new delivery van cost $45,000, and you expect to drive it for five years before selling it for about $5,000. The question your books have to answer is not whether that $40,000 of value disappears — it will — but when each dollar of it shows up as an expense. Spread it evenly and every year looks the same. Front-load it and your early profits look thinner while your later years look better. Tie it to mileage and your expense follows your odometer instead of your calendar.

That choice is your depreciation method, and it ripples further than most owners expect: it changes reported profit, the book value a lender reads on your balance sheet, and — because the tax return mostly follows its own schedule — the size of the book-tax difference you reconcile every year. This guide compares the four methods GAAP recognizes, with the formulas, a worked example using the same asset throughout, and guidance on when each one fits.

The three inputs every method shares​

Before the methods diverge, they all start from the same three estimates. Get these right and the method choice is refinement; get them wrong and no method saves you.

Cost is what you paid to get the asset ready for use: purchase price plus sales tax, delivery, and installation. A $42,000 machine plus $2,000 in freight and a $1,000 installation fee has a depreciable cost of $45,000, not $42,000.

Salvage value (also called residual value) is what you expect the asset to be worth at the end of its useful life — sale proceeds, trade-in credit, or scrap value, minus any cost of disposal. The amount you depreciate over the asset's life is cost minus salvage value, called the depreciable base. If the van will sell for $5,000, you depreciate $40,000, never the full $45,000.

Useful life is how long you expect to use the asset, and it is an estimate about your use, not the asset's physical maximum. A laptop that could physically survive eight years but gets replaced on your three-year refresh cycle has a three-year useful life. Review the estimate periodically: if you keep the van a sixth year, you adjust going forward rather than restating the past.

Throughout this guide, the worked example is a $45,000 asset with a $5,000 salvage value (a $40,000 depreciable base) and a five-year useful life — or, for the usage-based method, a lifetime capacity of 200,000 miles.

1. Straight-line: the same expense every period​

The straight-line method divides the depreciable base evenly across the useful life. It is the default most small businesses use, and the one auditors question least.

The formula:

Annual depreciation = (Cost − Salvage value) ÷ Useful life

For the example asset: ($45,000 − $5,000) ÷ 5 = $8,000 per year, or $666.67 per month. After three years, accumulated depreciation is $24,000 and the book value is $21,000.

Straight-line fits assets that deliver their value evenly over time: office furniture, buildings, leasehold improvements, and anything where usage does not vary much year to year. Its strengths are simplicity and comparability — anyone reading your statements instantly understands the pattern. Its weakness is realism for assets that lose value fast early on: a work truck rarely loses exactly one-fifth of its value in year one.

Book the monthly charge as a plain recurring transaction. In a Beancount ledger it looks like this:

2026-01-31 * "Monthly depreciation — delivery van (straight-line, 60 months)"
  Expenses:Depreciation:Vehicles                  666.67 USD
  Assets:Vehicles:Accumulated-Depreciation        -666.67 USD

The accumulated-depreciation account is a contra-asset: it grows more negative as the van ages, so the balance sheet shows cost, less accumulated depreciation, equals the $21,000 book value a lender actually reads.

2. Declining-balance: bigger deductions up front​

Declining-balance methods apply a fixed rate to the asset's current book value each year rather than spreading the base evenly. Because the base shrinks every year, the expense does too — a front-loaded pattern that matches assets which lose value fastest when new.

The most common variant is double-declining-balance (DDB), which doubles the straight-line rate. The formula:

Annual depreciation = 2 ÷ Useful life × Beginning-of-year book value

For the five-year example asset, the rate is 2 ÷ 5 = 40%:

Notice two things. First, declining-balance ignores salvage value in the formula — it just applies the rate — but it must never depreciate below salvage value. That is why year 5 takes only $832 instead of 40% of $5,832: the plug that lands exactly on the $5,000 floor. Second, some companies switch to straight-line for the final years once the straight-line charge on the remaining balance exceeds the declining-balance amount; either approach is acceptable as long as it is applied consistently.

A gentler variant is 150%-declining-balance (1.5 ÷ life, or 30% here), which front-loads less aggressively. DDB fits vehicles, computers, and equipment that shed value quickly early on. The trade-off: early profits look thinner, which can matter if a loan covenant or an earn-out is tied to net income.

3. Units-of-production: expense follows usage​

The units-of-production method ties depreciation to actual output — miles driven, hours run, widgets produced — instead of the calendar. In a slow year you book little; in a heavy year you book a lot.

The formula:

Depreciation per unit = (Cost − Salvage value) ÷ Lifetime capacity
Period expense = Depreciation per unit × Units used in the period

For the van with a 200,000-mile lifetime capacity: $40,000 ÷ 200,000 = $0.20 per mile. Drive 50,000 miles in year one and the charge is $10,000; drive 25,000 in year two and it is $5,000.

This is the most accurate method when wear correlates with use: delivery fleets with telematics, manufacturing equipment with hour meters, mining and printing operations. Its cost is administrative — you need reliable usage records, and estimating lifetime capacity (how many total miles will this van run?) is harder than estimating years. If the van ends up running 240,000 miles, you revise the per-unit rate prospectively rather than rewriting history. When usage is roughly constant year to year, this method converges on straight-line with extra bookkeeping, so only choose it when usage genuinely varies.

4. Sum-of-the-years'-digits: front-loaded by formula​

Sum-of-the-years'-digits (SYD) is the other accelerated method: it front-loads expense like declining-balance, but through a declining fraction of the depreciable base rather than a fixed rate on book value.

The denominator is the sum of the digits of the useful life: for five years, 1 + 2 + 3 + 4 + 5 = 15 (or equivalently N × (N + 1) ÷ 2 = 5 × 6 ÷ 2 = 15). Year 1 takes 5/15 of the base, year 2 takes 4/15, and so on down to 1/15:

Unlike declining-balance, SYD builds salvage value into the base from the start, so no year-end plug is needed — the fractions always sum to 1 and the book value lands exactly on salvage. The front-loading is also milder than DDB ($13,333 vs. $18,000 in year one here). SYD fits assets that are most productive when new and fade steadily: manufacturing equipment with rising maintenance costs is the textbook case, since falling depreciation roughly offsets rising repair bills and total cost stays level.

The honest caveat: SYD is rare in practice. Most companies that want acceleration use declining-balance for books and the tax system's own accelerated schedule for the return, so SYD survives mainly in textbooks and CPA exams. Know the formula, but expect to meet it less often than the other three.

Side-by-side: the same asset under all four methods​

Putting the worked example together (year-one UOP assumes 50,000 miles):

Every method depreciates the same $40,000 over the asset's life — the choice is purely about timing. That timing still matters: accelerated methods defer taxable income only if the tax return follows them, which, as the next section explains, it usually does not.

Your books and your tax return use different schedules​

Here is the point that confuses most owners: the four methods above are book depreciation under GAAP. Your federal tax return generally uses MACRS (the Modified Accelerated Cost Recovery System), which assigns IRS-defined recovery periods and uses 200%-declining-balance for most equipment — and it ignores salvage value entirely.

On top of MACRS, two provisions can dwarf the method choice for tax purposes:

• Section 179 expensing lets you deduct qualifying equipment immediately, up to an annual dollar limit ($1,250,000 for 2025), subject to taxable-income limits and a phaseout once total equipment purchases pass a threshold.
• Bonus depreciation allows an immediate percentage write-off of qualifying property. The rate had been phasing down — 40% for 2025 — but legislation reinstated 100% for qualifying property acquired and placed in service after January 19, 2025, so confirm which vintage your purchase falls in before you plan around a number.

The practical consequence: you can use straight-line on your books for clean, comparable financials while your tax return takes Section 179 or bonus depreciation. The gap between the two is a book-tax difference you track and reconcile — commonly the largest one on a small business return. Keep a fixed-asset register that records both the book method and the tax treatment per asset, and the reconciliation writes itself.

How to choose, and how to change​

Match the method to the asset's value pattern, not to the tax outcome you want — the tax return will do its own thing regardless:

• Steady-use assets (furniture, buildings, improvements): straight-line.
• Fast-fading assets (vehicles, computers): double-declining-balance.
• Usage-driven assets with metered output (fleet, machinery): units-of-production.
• Productivity-fading assets with rising maintenance: sum-of-the-years'-digits.

Apply your choice consistently: GAAP expects the same method for similar assets across periods, and switching methods to manage earnings is exactly what auditors look for. A genuine change — new information about how an asset is used — is treated as a change in accounting estimate, applied prospectively to the remaining book value over the remaining life, with disclosure in the notes. Changing the tax method is stricter and generally requires filing Form 3115 to request an accounting-method change.

Whatever you choose, revisit salvage value and useful life when reality diverges from the estimate. A van you planned to sell at five years but now run to eight needs its remaining depreciation respread — a two-minute prospective adjustment that keeps every future period honest.