Assets like computers, delivery trucks, or furniture don’t last forever. They lose value as they are used or become outdated. Depreciation makes your financial reports more accurate by showing how much of that asset’s value has been "used up" each year.

There are a few common ways to calculate depreciation, and the method you choose affects how much expense you report each year.

The most basic method is called Straight-Line Depreciation. Here, the asset’s cost is divided equally over its useful life. For example, if a laptop costs $1,000 and will last 5 years, you record $200 each year as depreciation.

Another method is Declining Balance Depreciation. This method applies a fixed percentage to the asset’s remaining value each year. So, if a vehicle costs $10,000 and the rate is 20%, the first year’s depreciation is $2,000. The next year, you apply 20% to the remaining $8,000, which gives you $1,600—and it continues like that.

The third method is Units of Production Depreciation. This is used when the asset’s value depends on how much it’s used. If a machine is expected to produce 10,000 units and it costs $5,000, each unit “uses up” $0.50 of value. If the machine produces 2,000 units this year, you record $1,000 as depreciation.

Each method has its own use. Choose the one that fits your business best.