Key Terms Associated with Depreciation

Term	Description
Cost	The initial purchase price of the asset including its initial cost, transportation, sales tax, installation and other expense to make it ready for use.
Estimated Useful Life	The Projected life during which the business expects the asset to be useful. It can be expressed in number of years, units of production or other measures as appropriate.
Residual Value (Salvage Value)	The estimated value of the asset at the end of its useful life.
Depreciation	The allocation of the asset’s cost as an expense over its useful life.
Accumulated Depreciation	The total amount of depreciation expense recorded for the asset up to a specific point in time.
Net Book Value	The current value of the asset on the balance sheet, calculated as Cost less Accumulated Depreciation.

Depreciation Methods with Usage Guidance

Depreciation	Formula	Usage Guidance

Straight-Line Method

(Cost-Residual Value)/Estimated Useful Life

– Best for assets with uniform usage over time. – Provides a consistent depreciation expense every year.

Double-Declining Balance (DDB)

2 X (Net Book Value at the beginning of year/Estimated Useful Life)

– Suitable for assets that lose value quickly in the early years (e.g., tech equipment). – Provides higher early depreciation.

Sum-of-the-Years-Digits (SYD)

(Remaining Life/Sum of the years ) X (Cost-Residual Value)

– Useful for assets that are more productive early in their life. -Results in higher depreciation in early years, decreasing over time.

Units of Production Method

((Cost -Residual Value) X Units Produced)/Total Estimated Production

– Best for assets where depreciation is tied to usage or output (e.g., machinery). -Depreciation fluctuates with actual production.