Straight-Line Depreciation: The Two Numbers You Guess
The formula is the easy part. Only one of the three inputs is a fact, the other two are estimates you make, and in Malaysia the answer is not what LHDN will accept.
Updated on 10 min read
Quick answer: the formula, and the part nobody explains
Annual depreciation = (Cost - Salvage Value) / Useful Life
The arithmetic takes seconds. The difficulty is that two of the three inputs are not facts you can look up.
| Input | Where it comes from | How certain |
|---|---|---|
| Asset cost | The purchase invoice | Certain |
| Useful life | Your judgement about how long you will use it | Estimate |
| Salvage value | Your judgement about resale at the end | Estimate |
That is not a flaw in the method. Depreciation is a reasonable way of spreading a cost, not a measurement of what something is worth.
Only one input is a fact
Cost comes from the invoice, and it should include what you spent getting the asset ready to use, not just the purchase price. Delivery, installation, and initial setup normally belong in the cost rather than in expenses.
Useful life and salvage value are both judgements about the future. Two sensible owners can look at the same machine and reach different annual figures, and both can be defensible. What matters is that your assumptions are reasonable, written down, and applied consistently to similar assets.
The practical consequence: precision in the arithmetic is worth far less than care in the two estimates. The worked example later shows how much the answer moves when either one changes.
Key terms in plain English
- Asset cost
- What the business paid to acquire the asset and get it ready for use. This is the one input taken from a document rather than judgement.
- Useful life
- How many years the business expects to use the asset. Not how long it could physically last, but how long it will earn its keep for you.
- Salvage value
- Also called residual value. What you realistically expect to receive for the asset when you finish with it. For many assets this is zero.
- Depreciable amount
- Cost minus salvage value. This is the portion actually spread across the years, not the full purchase price.
- Accumulated depreciation
- The running total charged since the asset was bought. It is a contra asset, so it carries a credit balance and reduces the asset on the balance sheet.
- Book value
- Cost minus accumulated depreciation. An accounting figure describing what is left to charge, not an estimate of what the asset would sell for.
- Capital allowance
- The tax relief Malaysia grants on qualifying assets under Schedule 3 of the Income Tax Act 1967. It replaces accounting depreciation for tax purposes.
Estimating useful life
The question is not how long the asset could survive. It is how long your business will actually use it. If you intend to replace laptops every three years, their useful life is three years even though they might run for eight.
| Factor | Effect on life | Why |
|---|---|---|
| Heavy or continuous daily use | Shortens | A van driven all day wears out faster than a spare |
| Rapid technology change | Shortens | Computers and phones are usually replaced before they break |
| Poor or skipped maintenance | Shortens | Machinery neglected now fails earlier |
| Careful servicing on schedule | Lengthens | Well-kept equipment stays productive longer |
| Light or occasional use | Lengthens | A backup unit used monthly outlasts a primary one |
| Plans to upgrade early | Shortens | If you will replace it in three years, its life is three years |
These ranges reflect common commercial practice rather than any rule, and they are a starting point for your own judgement:
| Asset | Often used | Reasoning |
|---|---|---|
| Laptops and phones | 3 to 4 years | Obsolescence usually arrives before failure |
| Office furniture | 5 to 10 years | Little to wear out, replaced for appearance |
| Motor vehicles | About 5 years | Common commercial practice, and resale is real |
| Machinery and equipment | 5 to 15 years | Depends almost entirely on usage intensity |
Estimating salvage value
Ask one question: at the end of the period above, what could I realistically expect somebody to pay me for this?
For a great many business assets the honest answer is nothing. Computers, phones, and specialised equipment usually reach the end of their useful life with no meaningful resale value, so zero is both realistic and the conservative choice. Vehicles are the common exception, since there is an active second-hand market.
Note the direction of the effect. A higher salvage value means a smaller depreciable amount, which means a lower annual charge and a higher reported profit. If you find yourself reaching for an optimistic salvage figure, be aware that is what it does.
When the amount is small and you are genuinely unsure, zero is easy to justify and easy to apply consistently.
What book value is not
Book value is cost minus accumulated depreciation. Three misreadings of that figure cause most of the confusion.
Book value is not market value
The two numbers answer different questions and rarely agree.
Book value records how much of the cost you have charged to profit so far. Market value is what somebody would pay you today. A three-year-old van can easily be worth more than its book value, or far less, without either figure being wrong.
A fully depreciated asset can still be working
Reaching the end of the schedule changes the accounting, not the machine.
When accumulated depreciation reaches the depreciable amount, you stop charging depreciation and the asset sits at its salvage value. You do not stop using it, and you do not remove it from the books. It simply costs nothing more in depreciation terms.
Selling for a different amount is a gain or loss, not a correction
You do not go back and rewrite earlier years.
If you sell for more than book value you record a gain on disposal, and if you sell for less you record a loss. The earlier depreciation was based on the best estimate available at the time and stays as it was.
Because depreciation shrinks the asset figures on the balance sheet, it also lifts return on assets over time. That is worth remembering when judging whether a ratio is good, because two identical businesses with different asset ages will not look alike.
Why LHDN ignores your depreciation figure
This surprises most Malaysian business owners the first time they meet it. Accounting depreciation is not deductible for Malaysian income tax. The figure you carefully calculated does not reduce your tax bill.
Instead, depreciation is added back when accounting profit is reconciled to taxable income, and relief is claimed through capital allowances under Schedule 3 of the Income Tax Act 1967. These follow their own rules and their own rates.
| Accounting depreciation | Capital allowances | |
|---|---|---|
| Purpose | Spread cost across the years used | Grant tax relief on qualifying assets |
| Who sets the rate | You do, through your estimates | Prescribed by asset category |
| Salvage value | Reduces the depreciable amount | Not applied in the same way |
| Effect on tax | None, it is added back | This is what reduces taxable income |
Broadly, a qualifying asset can attract an initial allowance in the year it is acquired plus an annual allowance thereafter, with the annual rate depending on the asset category. The result is that the same machine can carry one number in your accounts and a different number in your tax computation, and both are correct for their own purpose.
Rates, eligibility, and asset categories change and depend on the specific asset. Confirm the treatment with current LHDN guidance or a qualified tax agent before relying on it for a tax computation.
Worked example, and how much the estimates matter
A machine costs RM 10,000, is expected to be used for five years, and to be worth RM 1,000 at the end. The depreciable amount is RM 9,000, so the annual charge is RM 1,800, or RM 150 a month.
| Year | Depreciation (RM) | Accumulated (RM) | Book value (RM) |
|---|---|---|---|
| 1 | 1,800 | 1,800 | 8,200 |
| 2 | 1,800 | 3,600 | 6,400 |
| 3 | 1,800 | 5,400 | 4,600 |
| 4 | 1,800 | 7,200 | 2,800 |
| 5 | 1,800 | 9,000 | 1,000 |
The schedule ends exactly at the salvage value, which is the check that the numbers were applied correctly. Now change one estimate at a time and watch what happens.
| Change | New annual charge | Difference |
|---|---|---|
| Original estimates | RM 1,800 | - |
| Salvage value set to zero | RM 2,000 | About 11 percent higher |
| Useful life cut to 3 years | RM 3,000 | About 67 percent higher |
Useful life moves the answer far more than salvage value does. If you are going to spend care on one of the two estimates, spend it there. The depreciation calculator makes this easy to test: change one input, see the annual and monthly charge move, and settle on assumptions you can defend.
Before you record depreciation
- I used the full cost of getting the asset ready for use, not just the invoice price.
- I set useful life based on how long the business will use it, not how long it could last.
- I used zero salvage value where resale is unlikely.
- I checked that salvage value is lower than cost.
- I applied the same assumptions to similar assets for consistency.
- I understand that book value is not market value.
- I know accounting depreciation is added back for Malaysian tax purposes.
- I will revisit the estimates if plans for the asset change.
This guide explains general accounting concepts for learning and review. It is not accounting or tax advice for a specific business, and the Malaysian tax treatment described should be confirmed with current LHDN guidance or a qualified tax agent.
Test your two estimates
Enter cost, salvage value, and useful life to see the annual and monthly charge, then change one input to see how sensitive the answer is.
Sources
This guide is based on the official pages below, last checked on 19 August 2026. Where they disagree with anything written here, they are the authority.
- IAS 16 Property, Plant and Equipment
Depreciation methods, useful life and residual value, and the requirement to review those estimates. MASB adopts this in Malaysia as MFRS 116.
- LHDN Public Rulings
Capital allowances, which replace book depreciation in a Malaysian tax computation. See PR 6/2015 on qualifying expenditure and PR 12/2014 on qualifying plant and machinery.
How this content is put together is set out in our editorial policy.
Depreciation FAQs
Why do I depreciate something I already paid for?
Because the payment and the benefit happen at different times. You pay for a machine once, but it helps you earn income for several years. Depreciation spreads the cost across those years so each period carries a fair share, instead of one month absorbing the whole amount and looking artificially unprofitable.
Do I depreciate land?
No. Land is normally not depreciated because it does not have a limited useful life in the way a machine or vehicle does. Buildings standing on land are depreciated, so the two are usually recorded separately when they are bought together.
What if my useful life estimate turns out to be wrong?
You adjust going forward rather than rewriting the past. Take the current book value, subtract the salvage value, and spread what remains over the revised number of years still expected. Earlier years stay as they were, because they reflected the best estimate available at the time.
Is straight-line the only depreciation method?
No. Reducing balance charges a percentage of the falling book value each year, so more of the cost lands in the early years. Straight-line is the most common for simple accounts because the charge is the same every period, which makes budgeting and checking easier.
What happens when an asset is fully depreciated but still in use?
You stop charging depreciation and leave the asset in the books at its salvage value. Nothing about the asset changes and you keep using it normally. If you later sell it, the difference between the sale proceeds and that remaining book value is a gain or loss on disposal.
Does the Depreciation Calculator handle Malaysian capital allowances?
No. It calculates straight-line accounting depreciation from cost, salvage value, and useful life. Capital allowances follow separate rules under Schedule 3 of the Income Tax Act 1967, with different rates by asset category, so that computation has to be done separately.