What are depreciation and amortization?
Depreciation allocates the depreciable cost of a tangible asset, such as equipment or a vehicle, over its useful life. Amortization applies the same allocation idea to finite-life intangible assets, such as qualifying software or licences. D&A combines the two charges. It is an expense allocation, not an estimate of the asset’s resale price.
Accounting classification comes before calculation. Not every payment for software creates an intangible asset, and not every intangible asset has a finite life. The IFRS Foundation’s overviews of IAS 16: Property, Plant and Equipment and IAS 38: Intangible Assets provide accounting context. This calculator assumes an eligible depreciable or amortizable position; it does not decide recognition or provide tax depreciation tables.
Straight-line depreciation formula
Annual depreciation = (asset cost − residual value) ÷ useful life. This calculator assumes a residual value of zero, so the annual charge is cost divided by life. The first charge follows your commissioning convention, and the last charge is capped at the remaining net book value.
For an addition of 100,000 with a five-year life, a full annual charge is 20,000. A later addition is a new basis with its own life and timing. It should not reset the depreciation clock of older assets. Use another position for additions with different assumptions; the calculator aggregates their annual charges.
Useful life, residual value and opening balances
Useful life is the period over which you expect to use the asset economically. A longer life spreads the same cost across more years and reduces each full-year charge. This changes reported profit and asset balances, but does not change the original purchase payment. Use a supportable operating assumption rather than choosing a life solely to reach a profit target.
A residual value is the expected amount remaining at the end of use. It reduces the depreciable basis; it is not an additional annual expense. Residual values are fixed at zero in this calculator and the detailed BalanceCheat schedule. If a material residual is necessary for your analysis, calculate an appropriately adjusted D&A plan separately rather than treating residual value as another addition.
An existing opening net book value does not reveal original cost or acquisition date. In the Advanced model, enter its remaining useful life explicitly. The model spreads opening NBV across that remaining life, separately from new additions. The standalone straight-line calculator starts with additions; the percentage method instead starts with an existing opening balance.
Commissioning and first-year depreciation
Full-year gives an addition one full annual charge in its addition year. Half-year gives half the normal charge first, then full annual charges until a final capped remainder. These are explicit financial-planning conventions; selecting one does not establish compliance with a particular accounting or tax regime.
Exact date uses actual calendar days from commissioning through 31 December, including the commissioning day, divided by 365 or 366 days in that year. It does not use a monthly approximation. Choose a date within the selected addition year. A 15 March 2026 start gives 292/365 of a full-year charge; a 1 July 2028 start gives 184/366. Subsequent full years retain the original cost and life.
Worked example: machinery and software
Machinery costing 100,000 is added in 2026, with a five-year life and a full-year convention. Annual D&A is 20,000 from 2026 to 2030; closing NBV falls from 80,000 to zero. A half-year convention would produce 10,000 in 2026, 20,000 in each of 2027–2030 and 10,000 in 2031. Total D&A remains 100,000.
Now add software costing 60,000 in 2027 with a three-year life and full-year convention. Combined D&A is 20,000 in 2026, 40,000 in 2027–2029 and 20,000 in 2030. At the end of 2027, machinery NBV is 60,000 and software NBV is 40,000: total NBV is 100,000. Expand the schedules by position to see the components behind the total.
Percentage and direct-amount methods
Percentage method: D&A = opening asset base × rate. With opening NBV of 100,000 and a 20% rate, first-year D&A is 20,000 and closing NBV is 80,000. The following year begins at 80,000, producing D&A of 16,000. This is a top-down forecasting assumption; it is not the same as five-year straight-line depreciation. No useful-life or commissioning input is needed.
Direct amount simply totals the D&A amounts you enter. It is useful when you already have a charge from a separate budget or schedule. No asset balance can be inferred from the expense alone, so this method shows no asset table. All amounts use the same currency and scale, and percentage rates are entered as 20 for 20%.
D&A, EBITDA, EBIT and cash flow
For otherwise unchanged operating inputs, EBIT = EBITDA − D&A. D&A therefore lowers EBIT but does not lower EBITDA. The EBITDA calculator and EBIT calculator explain this bridge. A lower depreciation charge can increase EBIT without improving sales, operating efficiency or cash receipts.
In an indirect cash flow statement, D&A is added back to net income because the charge itself is non-cash. This does not make asset purchases free: investment payments appear separately in investing cash flow. Tax effects can alter operating cash flow, depending on the applicable tax assumptions. The BalanceCheat model applies its modeled tax rate to positive taxable earnings; this calculator does not forecast tax payments.
Asset closing balance follows opening NBV + additions − carrying-value disposals − D&A. Tangible positions feed PP&E; separately scheduled intangible positions feed other non-current assets in the Advanced model. Their D&A reaches the income statement and cash-flow add-back once. See the three-statement model guide for the connected statements.
Common modeling mistakes
Do not divide each year’s declining NBV by the original life and call it straight-line. Do not depreciate an addition before its selected addition year. Do not apply a new vintage’s useful life retrospectively to old vintages without explicitly changing the model’s treatment. Also avoid entering D&A again in operating costs when it is already modeled separately.
The standalone schedule has no disposals or historical asset register. In the Advanced model, a carrying-value disposal is allocated proportionally across the available positions’ internal vintages before that year’s charge. Both remaining NBV and corresponding cost basis fall, preventing continued depreciation of the disposed share. Disposal proceeds equal carrying value in this simplified model; gains, losses and impairment require separate treatment.
A displayed horizon can end before an asset is fully depreciated. Increase the years shown to inspect the final charge; a positive closing NBV at the end of a short forecast is not automatically an error. The calculator supports up to ten positions and thirty annual periods. Its model CTA opens the workspace without importing or replacing your saved model.
Frequently asked questions
Is amortization calculated differently from depreciation here?
No. The same finite-life straight-line schedule can model a tangible position or a qualifying intangible position. Accounting classification and recognition remain separate decisions.
Why does half-year depreciation extend into a sixth year for a five-year asset?
The first year contains only half a normal charge. After four full annual charges, another half-charge remains. The schedule caps the final charge so total depreciation equals the cost with zero residual value.
Can I use different commissioning dates for later additions?
Yes. Add a position for each set of addition assumptions in this calculator. In the Advanced model, each asset position can have different additions, useful lives and commissioning dates by forecast period.
Does a 20% opening-balance rate equal a five-year useful life?
Only the first charge matches when both start from the same cost and use a full year. The percentage charge shrinks with the opening balance; straight-line continues using the original vintage’s cost and life.
Does depreciation generate cash?
No. Adding back a non-cash expense reconciles profit to cash flow. The purchase payment remains an investing outflow, and any tax cash benefit depends on the tax treatment.
Does this calculate tax depreciation or residual values?
No. These are annual financial-modeling schedules with zero residual value. No jurisdiction-specific tax rates, depreciation tables or automatic recognition decisions are included.