Equipment depreciation: Types and how to calculate it

Equipment depreciation is a key accounting concept that companies need to understand to maintain their financial health. In addition to tracking the wear and decrease in value of assets over time, it influences tax planning and investment decisions. By distributing the cost of an asset throughout its useful life, businesses can manage resources more efficiently and make smarter financial choices.

In this post, we outline equipment depreciation, ways to calculate it, and the different types, offering you a complete overview of this crucial factor in business management.

What is equipment depreciation?

Equipment depreciation is the process of allocating the cost of an asset across its service life. Instead of recording the full expense at the time of purchase, it’s spread over multiple accounting periods. In most countries, this expenditure is deductible, making it a vital tool for financial planning. Depreciation measures the value equipment loses through use and the passage of time.

This accounting process enables organizations to distribute the cost of essential industrial machines and devices over several years, gradually recouping their investment. This is especially important for assets critical to operations, such as stacker cranes for pallets, autonomous mobile robots, and other automation tools employed in warehouses.

Advantages of equipment depreciation

Although the specifics vary by country, equipment depreciation can offer businesses several advantages:

• By spreading acquisition costs over multiple years, the first year of purchase doesn’t carry an unusually high expense. This helps ensure financial results aren’t overly skewed and that the company’s statements reflect the asset’s value more accurately.
• In some cases, the amounts allocated for depreciation may qualify for additional tax deductions, such as with accelerated depreciation. While this accounting practice is widely used — and applicable to industrial and automated warehouse machinery — organizations should check their local tax regulations to ensure proper compliance.

Having clear information on equipment depreciation supports informed decision-making in asset lifecycle management, including replacement, maintenance, and repairs.

Types of equipment depreciation

There are several ways to calculate equipment depreciation. Some of the most common include straight-line (SL), declining-balance (DB), and units-of-production (UoP). Each system has its advantages, so the choice should take into account the nature of the asset and applicable accounting standards.

Straight-line depreciation

This technique spreads the depreciation of an asset evenly over its useful life, resulting in fixed annual deductions. Typically, the calculation considers the equipment’s expected lifespan and its original purchase cost.

Straight-line depreciation formula:

With this approach, the depreciation expense remains the same every year, regardless of how long the equipment has been in operation. When considering the SL method, companies should consult the limits set by local tax tables, which also specify the maximum allowable depreciation period.

Declining-balance depreciation

Equipment depreciation can also be calculated using the declining-balance system with a fixed percentage. Under this approach, a preset rate is applied to the remaining book value (cost minus depreciation) of the asset. Since this amount decreases every year, the depreciation expense declines over time.

Declining-balance depreciation formula:

To ensure compliance, businesses should utilize the DB method per their countries’ official depreciation tables, which set the minimum and maximum allowable rates for assets.

Units-of-production depreciation

Equipment depreciation can also be linked to the number of items the asset is expected to produce over its lifespan. With the UoP technique, the total cost of the machinery is divided by the estimated total output (units).

Units-of-production depreciation formula:

To calculate the annual depreciation cost based on actual production, multiply the result by the number of units produced in a given year:

Examples of industrial equipment depreciation

Let’s look at some examples of how different approaches work in practice:

• SL depreciation. If a machine cost $50,000 at the time of purchase, the simplest straight-line calculation would yield the following annual result: $50,000 / 10 years of estimated useful life = $5,000 per year.
• DB depreciation. This method applies a fixed percentage to the remaining book value each year. For example, a $50,000 machine with a double-declining rate (2 × 10%) would be calculated as follows:
  • Year 1: ($50,000 × 20% = $10,000).
  • Year 2: ($50,000 - $10,000) x 20% = $8,000
  • And so on.
• UoP depreciation. Suppose a $50,000 machine is expected to move 200,000 pallets over its service life. The depreciation would be: $50,000 / 200,000 = $0.25 per pallet. Unlike the straight-line depreciation method, the units-of-production system reflects fluctuations in annual production volumes.

When choosing which depreciation method to adopt, companies should consider the type of equipment and its usage patterns. Straight-line depreciation, for instance, is widely used for office equipment. The declining-balance technique is suited to assets with high initial resale value but that depreciate quickly. Meanwhile, the units-of-production system works best when output varies from year to year.

The value of equipment depreciation

In short, equipment depreciation is an indispensable financial tool that reflects the gradual loss in value of an organization’s fixed assets over their lifespan. Businesses should choose the approach that best fits their circumstances, tax requirements, and operational needs. By recognizing wear and obsolescence, depreciation distributes the cost of equipment over time, supports investment planning, and helps present a more transparent financial picture.