Depreciation Schedules: Straight-Line vs Declining Balance

How to build a depreciation schedule — the straight-line and declining-balance formulas, and how depreciation flows through all three financial statements.

Depreciation is where accounting and cash part company, and it trips up more models than almost anything else. It reduces profit but moves no cash; it sits on the income statement, gets added back in the cash flow statement, and quietly erodes an asset on the balance sheet — all at once. Building the schedule correctly is what makes those three statements reconcile.

Definition

Depreciation allocates the cost of a long-lived asset across the years it is used, rather than expensing it all at purchase. It is a non-cash charge: the cash left when the asset was bought (as CAPEX), not when it is depreciated.

Straight-line depreciation

Formula

Straight-line depreciation = (Cost − Salvage value) / Useful life

Straight-line spreads the cost evenly: a $100,000 asset with a 5-year life and no salvage value depreciates $20,000 a year, every year. It is simple, predictable and by far the most common method in financial models and published accounts, because it is easy to audit and does not distort year-on-year comparisons.

Year	Opening NBV	Depreciation	Closing NBV
1	$100,000	$20,000	$80,000
2	$80,000	$20,000	$60,000
3	$60,000	$20,000	$40,000
4	$40,000	$20,000	$20,000
5	$20,000	$20,000	$0

Straight-line schedule — $100,000 asset, 5-year life, no salvage

Declining-balance (accelerated) depreciation

Formula

Declining-balance depreciation = Opening net book value × rate · Double-declining rate = 2 / useful life (e.g. 40% for a 5-year asset)

Accelerated methods charge more in the early years, on the logic that assets lose most value when new and are most productive early on. Double-declining balance applies twice the straight-line rate to the shrinking book value. Because a percentage of a shrinking balance never quite reaches zero, practice is to switch to straight-line for the remaining book value once that gives a bigger charge — in the example below, from year 4.

$100k asset over 5 years, values in $000s. Accelerated methods front-load the expense — but total depreciation over the asset's life is identical at $100k.

The total is always the same

This is the point people miss: both methods depreciate exactly $100,000 over the asset's life. The method changes the timing of the expense, not the amount. What it genuinely changes is tax — and therefore cash. Charging more depreciation early reduces early taxable profit, defers cash tax, and improves early free cash flow, which in a DCF is worth real money because those savings are discounted less.

How depreciation flows through the three statements

Follow one charge through the model. On the income statement, depreciation is an expense that reduces operating profit and taxable income. On the cash flow statement, it is added straight back to net income, because no cash moved — the cash went out earlier as CAPEX. On the balance sheet, accumulated depreciation rises and net book value falls: opening NBV plus CAPEX minus depreciation equals closing NBV. If any of those three links is missing, the balance sheet will not balance.

Book vs tax depreciation

Many businesses run two schedules: a straight-line book schedule for reported accounts and an accelerated schedule for tax, because tax authorities often permit faster write-offs. The difference between them creates deferred tax. For most planning models one schedule is enough, but if the gap is material — as in real estate, energy or heavy manufacturing — modelling both gives a far more accurate cash tax figure, and therefore a far more accurate free cash flow.

Common mistakes

Depreciating an asset before it exists (mind the start period); deducting depreciation from free cash flow (it is CAPEX that consumes cash, not depreciation); forgetting to add it back in the cash flow statement; and applying one blanket useful life to a fleet of assets with very different lives.

Build the schedule automatically

EasyFinancialModels handles primary and secondary CAPEX items with their own useful lives and depreciation start periods, builds the straight-line schedule, feeds net book value to the balance sheet, adds depreciation back in the cash flow, and checks the whole thing reconciles before you download. Build a financial model free for up to 3 years and let the schedule take care of itself.

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How to Build a Financial Model in Excel · Quarterly Financial Model: When to Use Quarterly Forecasts Instead of Annual Models · Industry Financial Model Templates: How to Choose the Right Revenue Drivers · How to Build a Startup Financial Model for Investors · The Three-Statement Financial Model Explained

About the author

Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →

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