Depreciation Methods Compared: Straight-Line, DDB, Units-of-Production, and SYD

Depreciation Overview

Depreciation is the systematic allocation of a tangible asset's cost over its useful life. Under ASC 360, the method chosen should reflect the pattern in which the asset's economic benefits are consumed. The CPA FAR exam tests all four major depreciation methods, often requiring candidates to switch between them, calculate partial-year depreciation, or compare total expense across methods. Each method uses the depreciable base, which equals cost minus salvage (residual) value, except double-declining balance, which initially ignores salvage value.

Common Facts for All Examples

A machine is purchased on January 1, Year 1 for $120,000. Salvage value: $20,000. Useful life: 5 years. Estimated total production: 50,000 units. Depreciable base: $120,000 - $20,000 = $100,000.

Straight-Line Method

Annual depreciation = depreciable base / useful life = $100,000 / 5 = $20,000 per year.

Year 1: $20,000. Accumulated depreciation: $20,000. Book value: $100,000.
Year 2: $20,000. Accumulated depreciation: $40,000. Book value: $80,000.
Year 3: $20,000. Accumulated depreciation: $60,000. Book value: $60,000.
Year 4: $20,000. Accumulated depreciation: $80,000. Book value: $40,000.
Year 5: $20,000. Accumulated depreciation: $100,000. Book value: $20,000 (salvage).

Straight-line produces equal expense each year. It is the most common method and the simplest to calculate.

Double-Declining Balance (DDB) Method

DDB rate = (1 / useful life) x 2 = (1/5) x 2 = 40%. DDB applies this rate to the beginning book value (not the depreciable base), and the asset is never depreciated below salvage value.

Year 1: $120,000 x 40% = $48,000. Book value: $72,000.
Year 2: $72,000 x 40% = $28,800. Book value: $43,200.
Year 3: $43,200 x 40% = $17,280. Book value: $25,920.
Year 4: $25,920 x 40% = $10,368, but this would reduce book value to $15,552, which is below salvage. Depreciation is limited to $25,920 - $20,000 = $5,920. Book value: $20,000.
Year 5: $0 (book value already at salvage).

Total depreciation: $48,000 + $28,800 + $17,280 + $5,920 + $0 = $100,000.

DDB produces the highest expense in early years, making it the most accelerated method.

Sum-of-the-Years-Digits (SYD) Method

Sum of the years: 5 + 4 + 3 + 2 + 1 = 15 (or n(n+1)/2 = 5 x 6 / 2 = 15). Each year's fraction is applied to the depreciable base ($100,000).

Year 1: 5/15 x $100,000 = $33,333. Book value: $86,667.
Year 2: 4/15 x $100,000 = $26,667. Book value: $60,000.
Year 3: 3/15 x $100,000 = $20,000. Book value: $40,000.
Year 4: 2/15 x $100,000 = $13,333. Book value: $26,667.
Year 5: 1/15 x $100,000 = $6,667. Book value: $20,000 (salvage).

SYD is accelerated but less aggressive than DDB. It applies a declining fraction to the full depreciable base each year.

Units-of-Production Method

Depreciation per unit = depreciable base / estimated total units = $100,000 / 50,000 = $2.00 per unit. Annual depreciation varies with production volume.

Year 1 (12,000 units): 12,000 x $2 = $24,000
Year 2 (10,000 units): 10,000 x $2 = $20,000
Year 3 (8,000 units): 8,000 x $2 = $16,000
Year 4 (11,000 units): 11,000 x $2 = $22,000
Year 5 (9,000 units): 9,000 x $2 = $18,000

Total: $100,000. This method directly ties expense to the asset's usage, making it appropriate for assets whose wear correlates with output.

Partial-Year Depreciation

When an asset is acquired mid-year, depreciation for the first year is prorated. If the machine above were purchased on April 1, Year 1 (9 months of use):

Straight-line: $20,000 x 9/12 = $15,000
DDB: $48,000 x 9/12 = $36,000
SYD: $33,333 x 9/12 = $25,000

For DDB and SYD, the remaining 3/12 of the first full year's depreciation shifts into Year 2, affecting all subsequent calculations.

Comparison Summary

All four methods depreciate the same total amount ($100,000) over the asset's life. The difference is timing: accelerated methods (DDB, SYD) front-load expense, reducing early-year income and taxes. Straight-line provides consistent expense. Units-of-production matches expense to actual use. The choice of method affects financial ratios, tax planning, and management performance metrics.

Key Exam Tips

DDB uses book value (not depreciable base) and cannot depreciate below salvage value.
SYD uses the depreciable base with a declining fraction each year.
Total depreciation over the asset's life is the same under all methods.
For partial-year problems, prorate the first year and adjust subsequent years accordingly.
Be comfortable switching between methods when asked to compare expense amounts in a given year.