Business Mathematics: Depreciation - Depreciation & Salvage Value

Although the useful life of equipment (a fixed asset) may be long, it is nonetheless limited. Eventually the equipment will lose all productive worth and will possess only salvage value (scrap value). Accounting demands a period-by-period matching of costs against income. Hence, the cost of a fixed asset (over and above its salvage value) is distributed over the asset’s estimated lifetime. This spreading of the cost over the periods which receive benefits is known as depreciation.

The depreciable amount of a fixed asset–that is, cost minus salvage value–may be written off in different ways.

For example, the amount may be spread evenly over the years affected, as in the straight-line method. The units of production method bases depreciation for each period on the amount of output. Two accelerated methods, the double declining balance method and the sum-of-the- years’-digits method, provide for greater amounts of depreciation in the earlier years.