Every entrepreneur who has assets to depreciate in their balance sheet should know the difference between straight-line and declining balance depreciation. Even if the names may first sound scary, it is worth giving them a chance! In the end, depreciation is only mathematics and learning it does not take a whole day. Relax your shoulders and clear your mind – here we go!

Planned depreciation

Tax instructions explain that planned depreciation means recording the cost of fixed assets as expenses systematically during their useful life. In simple terms, it means that planned depreciation is just a plan for how you depreciate. So there are no options for straight-line depreciation, declining balance depreciation, or planned depreciation. There are only straight-line and declining balance depreciation. And when you choose one of these, that is your planned depreciation method.

So, when you buy assets for your company, you need to check whether you use straight-line or declining balance depreciation. Once you know this, you already have a plan and you can start making planned depreciation. Easy as that!

Straight-line depreciation

As its name suggests, straight-line depreciation refers to depreciation that is made evenly. In practice, the price of an acquired asset is written off over a certain period of time by a fixed amount. When using this depreciation method, you must know the asset’s economic life and acquisition price in advance in order to determine the annual depreciation amount. Depreciation is made every year by the same amount until the balance sheet value has reached zero and there is nothing left to depreciate.

Straight-line depreciation is used when the impact of the acquired asset on the company is the same in each depreciation year. Such assets include, for example, renovation costs for a rented apartment, connection fees, trademark rights, computer programs, patents and copyrights. Machinery and equipment – ​​or comparable assets, are never subject to straight-line depreciation. Straight-line depreciation is a easier depreciation method, but less used method among small business.

Declining balance depreciation

Even if the word “declining balance” may sound difficult, keep reading! By the end of this section, it will feel much clearer. Declining balance depreciation is a very common depreciation method among small business and is used when the impact of the asset has more effect on income in the beginning than later. That is, when you earn more from the asset immediately after you receive it and its impact decreases over the years. Common items that are subject to Declining balance depreciation include, for example, production machinery and equipment, vehicles, tools and office furniture. In balance sheet depreciation, a pre-agreed percentage of the asset’s undepreciated purchase price is written off annually. It sounds more complicated than it is!

Residual value never goes completely to zero with depreciation. The maximum you can deduct is always 25% of what is left. But, if you can show that the asset has no value anymore, or that its value is lower than the amount in the balance sheet, you can make an additional depreciation. With this extra depreciation, you can adjust the value to the real value, or even write off the whole residual value if the asset is worthless.

Even if their names sound difficult, both straight-line and declining balance depreciation are actually simple. And don’t worry – you don’t need to memorize them all at once. When you actually start doing them, everything will fall into place naturally!