Two different assumptions about how value is lost
Both methods spread an asset's (cost − salvage value) across its useful life — they differ entirely in when that depreciation is recognized.
Straight-line assumes value is lost at a constant rate every year — the simplest possible model:
annual depreciation = (cost − salvage value) / useful life
Declining balance assumes an asset loses a fixed percentage of its remaining book value each year — which means larger dollar amounts of depreciation early on (when book value is still high) and progressively smaller amounts later (as book value shrinks):
annual depreciation = remaining book value × rate
A side-by-side comparison
A $50,000 asset, $5,000 salvage value, 5-year life:
| Year | Straight-line depreciation | Declining balance (40% rate) |
|---|---|---|
| 1 | $9,000 | $20,000 |
| 2 | $9,000 | $12,000 |
| 3 | $9,000 | $7,200 |
| 4 | $9,000 | $4,320 |
| 5 | $9,000 | (capped at salvage value) |
Straight-line depreciates the same $9,000 every single year. Declining balance front-loads dramatically — $20,000 in year one alone, then progressively smaller amounts, since each year's depreciation is calculated against an already-shrunk book value.
Which real assets fit which pattern
Straight-line fits assets that genuinely lose value at a roughly constant rate over their life — buildings, certain furniture, and assets with fairly predictable, even wear.
Declining balance better models assets that lose most of their value in the first few years — vehicles, computers, and most consumer electronics, where a large chunk of value disappears the moment the item is purchased and used, with the rate of loss slowing down over time. This is exactly why a new car's value drops steeply in year one and much more gradually afterward — declining balance depreciation mirrors that real-world pattern far more accurately than straight-line's flat assumption.
Why declining balance caps at salvage value
Standard practice stops declining balance depreciation once book value reaches the salvage value — an asset's book value is never meant to depreciate below its expected residual worth at the end of its useful life. Without this cap, the percentage-based formula would asymptotically approach zero rather than reaching a defined endpoint, which doesn't match the accounting concept of a fixed, known salvage value.
Common mistakes
- Using straight-line for assets that clearly lose most value early (vehicles, tech hardware), understating early-year depreciation and overstating later book value relative to real market value.
- Forgetting declining balance needs a specified rate, unlike straight-line which only needs cost, salvage value, and useful life — the rate is a separate assumption that meaningfully changes the schedule's shape.
- Not capping declining balance at the salvage value, letting book value fall below the asset's defined residual worth — a real accounting error, not just a rounding quirk.
FAQ
Which depreciation method results in more depreciation in year one?
Declining balance, often substantially more — it's calculated as a percentage of the full original book value in the first year, before that value has shrunk at all.
Do both methods depreciate the asset down to the same salvage value eventually?
Yes — both are designed to bring book value down to the specified salvage value by the end of the useful life, they just take different paths (constant vs. front-loaded) to get there.
Which method should I use for a company vehicle?
Declining balance is generally more realistic — vehicles typically lose a large share of value in their first year or two, a pattern declining balance mirrors far better than straight-line's flat assumption.
Generate a full year-by-year schedule for either method with the Depreciation Calculator — entirely in your browser.