Depreciation Explained: Methods, Schedules, and Journal Entries

Depreciation spreads the cost of a long-lived asset across the periods that actually use it. Buy a machine for 24,000 € and you have not spent 24,000 € on this month's production — you have converted cash into a resource that will produce for five years. Depreciation is the accounting that reflects that.

It follows directly from the matching principle: the expense belongs to the periods that earn revenue from the asset, not to the period the invoice was paid. Which is why buying equipment creates no expense at all on day one — just one asset swapped for another, as covered in double-entry bookkeeping.

The inputs

Every depreciation calculation needs four things:

• Acquisition cost — the purchase price plus everything required to bring the asset into use: delivery, installation, non-recoverable duties. Recoverable VAT is not part of it.
• Useful life — how long the asset will serve this business, not its theoretical maximum lifespan.
• Salvage (residual) value — what it will be worth at the end of that life. Often zero in practice.
• Depreciation start date — normally when the asset is ready for use, which may be later than the purchase date.

The amount to spread is cost minus salvage value — the depreciable amount.

The methods

Straight-line — equal amounts every period:

Annual depreciation = (Cost − Salvage value) ÷ Useful life

A 24,000 € machine over 5 years with no salvage value: 4,800 € a year, or 400 € a month. It dominates in practice because it is simple, predictable, and honest for assets that wear out evenly.

Declining balance — a fixed percentage of the remaining book value, so charges are heavy early and light later. Double-declining at 40% on the same machine: 9,600 € in year one, then 5,760 €, then 3,456 €. Appropriate where an asset genuinely loses most of its value early — vehicles, computers — and where it matches the repair profile: high depreciation early when maintenance is low, low depreciation later when maintenance is high.

Units of production — depreciation per unit of output rather than per unit of time:

Per-unit depreciation = (Cost − Salvage) ÷ Total expected units

The only method that gives zero expense in an idle period, which makes it right for equipment whose wear tracks usage rather than the calendar.

Sum-of-the-years'-digits — another accelerated method, weighting each year by its reverse position in the life. Increasingly rare; declining balance achieves a similar profile with less arithmetic.

Method	Charge profile	Best for
Straight-line	Even	Buildings, fixtures, most equipment
Declining balance	Front-loaded	Vehicles, IT hardware
Units of production	Follows usage	Production machinery
Sum-of-years'-digits	Front-loaded	Legacy practice

A note on tax. Accounting depreciation reflects economic use; tax depreciation follows statutory rates and lives that may differ. Lithuania, for instance, prescribes maximum rates and lives by asset category for corporate income tax purposes. Where the two diverge, the accounts follow the accounting policy and the difference is handled in the tax computation — which is exactly why a profit before tax of 11,200 € rarely produces tax of exactly 17%, as noted in the income statement article.

The schedule

Straight-line, 24,000 € machine, 60-month life, no salvage value:

Period	Monthly charge	Accumulated	Net book value
Start	—	0	24,000
Month 1	400	400	23,600
Month 12	400	4,800	19,200
Month 15	400	6,000	18,000
Month 60	400	24,000	0

Note the balance sheet at month 15: cost 24,000 €, accumulated depreciation 6,000 €, carrying amount 18,000 € — the exact figures in the balance sheet example used across this series. The gross cost stays visible; that is deliberate, and it is why accumulated depreciation is a separate contra-account rather than a reduction of the asset account.

The journal entries

At acquisition — no expense, just a swap:

Account	Debit	Credit
1220 Machinery and equipment	24,000
2710 Bank		24,000

Each month — the adjusting entry that converts a slice of asset into expense:

Account	Debit	Credit
6206 Depreciation and amortization expense	400
1229 Accumulated depreciation — machinery (−)		400

Two things worth noticing. The credit never touches account 1220, so the original cost remains readable forever. And depreciation is the classic non-cash expense — profit falls by 400 €, the bank balance does not move, which is why it is added back in the indirect cash flow statement.

On disposal, both the cost and its accumulated depreciation are removed, and the difference against the proceeds is a gain or loss:

Account	Debit	Credit
2710 Bank (proceeds)	20,000
1229 Accumulated depreciation	6,000
1220 Machinery and equipment		24,000
5200 Other operating income (gain)		2,000

How Nordlet computes it

Assets belong to asset groups, and the group carries the accounting policy: the asset account, the accumulated-depreciation account, the expense account (6206 by default) and a default useful life. Creating an asset with POST /v1/assets/assets/create inherits those defaults, so a fleet of laptops is configured once rather than per device.

Depreciation is straight-line and monthly, and the formula is expressed as remaining value over remaining months:

Monthly charge = (total cost − salvage value − accumulated depreciation) ÷ remaining months

That formulation matters for two reasons. It self-corrects — if an asset is modernized (via /assets/modernize, which adds both cost and useful life), subsequent charges absorb the change automatically without rebuilding a schedule. And the final month takes the entire remaining value, so rounding never leaves a few cents stranded on a fully depreciated asset.

The monthly run is two calls: POST /v1/assets/depreciation/preview shows what would be posted, and /depreciation/post writes the entries. A period can only be posted once per asset — the constraint is in the database, not just the code — so an accidental second run cannot double-charge. Assets move from active to fully_depreciated automatically, and disposed when they leave.

Honest scope: straight-line is the only method implemented. Declining balance, units of production and sum-of-the-years'-digits are not available, so an asset needing an accelerated profile has to be handled with manual journal entries.

FAQ

What is depreciation in simple terms?

Spreading the cost of a long-lived asset over the periods that use it, instead of charging the whole cost when it is bought. It matches the expense to the revenue the asset helps produce.

Does depreciation involve any cash movement?

No. The cash left when the asset was purchased. Depreciation is a bookkeeping allocation of that earlier outflow, which is why it is added back to profit when calculating operating cash flow.

What is the difference between accumulated depreciation and depreciation expense?

Depreciation expense is one period's charge and appears in the income statement. Accumulated depreciation is the running total of all charges to date and sits on the balance sheet as a contra-asset, reducing the asset's carrying amount without erasing its original cost.

Which depreciation method should I use?

Whichever matches how the asset actually loses value: straight-line for even use, declining balance for assets that lose most value early, units of production where wear tracks output. Consistency matters more than sophistication — changing method changes reported profit.

Is accounting depreciation the same as tax depreciation?

Usually not. Accounting depreciation reflects your assessment of useful life; tax depreciation follows statutory rates and lives. The difference is resolved in the tax computation, not by changing the accounts.