Explanation

Depreciation allocates asset cost over its useful life. Straight-line: equal annual amounts = (Cost – Residual Value) / Useful Life. Simple and commonly used.

Reducing balance: fixed percentage of remaining value each year. Higher depreciation early, decreasing over time. Matches assets that lose value faster when new (vehicles, computers).

Sum-of-years-digits and units-of-production are other methods. Choice affects reported profit and asset values. Depreciation is a non-cash expense – no money leaves the business.