Depreciation: Straight-Line, Double-Declining & Sum-of-Years

Schedule — Straight-line

Year

Depreciation

Accumulated

Book value

9,500.00

90,500.00

9,500.00

19,000.00

81,000.00

9,500.00

28,500.00

71,500.00

9,500.00

38,000.00

62,000.00

9,500.00

47,500.00

52,500.00

9,500.00

57,000.00

43,000.00

9,500.00

66,500.00

33,500.00

9,500.00

76,000.00

24,000.00

9,500.00

85,500.00

14,500.00

Y10

9,500.00

95,000.00

5,000.00

Key Takeaways

Straight-line: annual = (cost − salvage) ÷ life; ¥100k, 5yr, 5% → ¥19,000/yr, ¥1,583/mo

Accelerated: double-declining = 2/5 = 40% × remaining book value; switch to SL when SL exceeds DDB

Tax lives (China): electronics 3yr, vehicles 4yr, machinery 10yr, buildings 20yr minimums

Convention: depreciation starts the month AFTER acquisition (CN rules)

Core answer: Depreciation spreads an asset's cost over its useful life. Straight-line: annual = (cost − salvage) ÷ years. A ¥120,000 machine, salvage ¥12,000, 10 years → ¥10,800/year, ¥900/month. China's tax law sets minimum lives: buildings 20 yr, machinery/equipment 10 yr, vehicles 4 yr, electronics 3 yr. Accelerated methods (double-declining, sum-of-years) front-load deductions for tech assets.

The four methods compared (¥120k asset, ¥12k salvage, 10 yr)

Method	Year 1	Year 5	Character
Straight-line	¥10,800	¥10,800	even, default
Double-declining (2/10 rate)	¥24,000	¥9,830	front-loaded
Sum-of-years-digits	¥19,636	¥10,800→ declining	front-loaded
Units of production	per actual use	varies	matches usage

Straight-line worked example

Cost ¥120,000 − salvage ¥12,000 = depreciable base ¥108,000 ÷ 10 yr = ¥10,800/yr. Monthly: ¥900. Book value after 4 years: 120,000 − 43,200 = ¥76,800.

Double-declining balance

Rate = 2 ÷ 10 = 20% applied to BOOK value (no salvage subtraction until the end): Y1 = 120,000×20% = 24,000; Y2 = 96,000×20% = 19,200; Y3 = 76,800×20% = 15,360… Switch to straight-line when it exceeds DDB (typically year 5–6), and never depreciate below salvage.

China's tax minimum lives (企业所得税法)

Asset class	Min years
Buildings	20
Aircraft, trains, ships, machinery	10
Production tools/furniture	5
Vehicles (non-transport)	4
Electronics	3

Small assets: one-off deduction allowed for equipment ≤ ¥5M (policy extended multiple times — check current-year rules). Depreciating faster than tax minimums creates deferred tax adjustments.

Worked examples

Example 1 — Delivery van. ¥150,000 van, 4-year tax life, 5% salvage: (150,000 − 7,500)/4 = ¥35,625/year deductible.

Example 2 — Laptop fleet. 50 laptops × ¥6,000 = ¥300,000; electronics 3 yr: ¥100,000/year straight-line — or deduct all ¥300,000 in year 1 under the ≤¥5M one-off policy, improving early cash flow.

Example 3 — Used-equipment pricing. Machine bought ¥120k, book value ¥76,800 at year 4, market offer ¥55,000: the ¥21,800 loss on disposal is tax-deductible — factor it into the sale decision.

Common mistakes and myths

Depreciating land — land does not depreciate (buildings do); split purchase prices.
"Depreciation is cash cost" — it's non-cash; the cash left at purchase. EBITDA adds it back for exactly this reason.
Ignoring salvage value — depreciating to zero when a vehicle reliably resells at 20% overstates expense.
Book value = market value — a fully-depreciated machine can still run for years (and sell for real money); book is accounting, not physics.
Forgetting placed-in-service dates — China tax rule: depreciation starts the MONTH AFTER commissioning, not the purchase month.

Frequently Asked Questions

How does straight-line depreciation work?

Annual depreciation = (cost − salvage value) ÷ useful life. ¥100,000 machine, 5-year life, 5% salvage (¥5,000): 95,000 ÷ 5 = ¥19,000/year, ¥1,583.33/month. Book value declines evenly: 81k, 62k, 43k, 24k, 5k (salvage floor). Straight-line is the default for books and most tax filings — predictable, simple, defensible.

How does double-declining balance work?

Rate = 2 ÷ life applied to the DECLINING book value (salvage ignored until the end). ¥100k, 5 years: rate 40% — year 1: 40,000 (BV 60k); year 2: 24,000 (36k); year 3: 14,400 (21.6k); then switch to straight-line when SL beats DDB, flooring at salvage. Front-loads expense: good for assets that lose value fast (tech) and for tax deferral where allowed.

How does sum-of-years-digits work?

Weight by remaining life: 5-year life → digits 5+4+3+2+1 = 15; year 1 gets 5/15 of (cost − salvage), year 2 gets 4/15... ¥95k depreciable: year 1 = 31,667; year 5 = 6,333. Also accelerated, gentler than DDB. Both accelerated methods total the same ¥95k — timing differs, and time is money (earlier deductions are worth more).

What useful lives does tax law require?

China corporate income tax minimums: houses/buildings 20 years; aircraft/trains/ships/machinery 10 years; tools/furniture 5 years; vehicles (non-ship) 4 years; electronic equipment 3 years. Shorter book lives create tax adjustments (add-backs). Software can amortize over 2+ years. Accelerated methods are permitted for qualifying assets (high-tech, rapid-obsolescence) — the one-time expensing policy for small assets has been extended repeatedly; check the current threshold.

How is monthly depreciation prorated?

China convention: depreciation begins the month AFTER the asset is put into use and stops the month after disposal — buy on Jan 15, first depreciation month is February. Monthly = annual ÷ 12 (straight-line). Mid-year purchase means year 1 shows 11 months or fewer. Books vs tax conventions can differ — keep a fixed-asset register with per-asset schedules to reconcile.

What mistakes happen with depreciation?

(1) Depreciating land (land does not depreciate — buildings do); (2) forgetting salvage value in straight-line (overstates expense); (3) DDB without the salvage floor or the SL switch (under-depreciates the tail); (4) starting depreciation in the purchase month (CN: next month); (5) book life ≠ tax life without tracking the deferred-tax difference; (6) expensing capital items directly (a ¥50k machine is not "office supplies" — audit red flag); (7) thinking depreciation affects cash — it is non-cash; EBITDA adds it back, but the cash left at purchase time.