Depreciation
Depreciation allocates a long-lived asset's cost as an expense across the periods it helps generate revenue. The straight-line method spreads this evenly: annual charge equals cost minus residual value, divided by useful life.
Also known asamortisation
See it move
A waterfall chart traces a straight-line depreciation schedule on an asset with an original cost of €30,000. Equal annual charges of €3,000 are deducted in Year 1 and Year 2, followed by a further seven years of €3,000 per year (shown as a combined step of €21,000 for Years 3 to 9), leaving a residual value of €3,000 at the end of the asset's useful life.
The formula
Variables
- Annual depreciation charge (€)
- Historical cost of the asset (€)
- Residual (salvage) value at end of useful life (€)
- Useful life in years (years)
Straight-line method
Check yourself
A machine costs €42,000, has an estimated residual value of €6,000, and a useful life of nine years. Using the straight-line method, what is the annual depreciation charge?
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
HGB applies a strict historical-cost principle and does not permit upward revaluations of depreciable assets. Useful lives and rates may be aligned with the German tax authority's published depreciation tables (AfA-Tabellen), so the annual charge in the statutory accounts can follow the maximum tax-deductible amount rather than reflecting the pure economic consumption of the asset.
IFRS
IAS 16 requires that depreciation reflect the pattern in which future economic benefits are consumed by the entity, based on management's own estimate of the asset's useful life and independent of any tax schedule. IAS 16 additionally offers a revaluation model under which an entire class of assets may be periodically restated to fair value, adjusting the depreciable base and potentially reversing prior write-downs within that class.