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Depreciation Schedule

Glossary Term • Beginner • 3 min read

Audience
Model Developers • Auditors
Last Reviewed
July 2026
Updated
Version 1.0

Executive Summary

A depreciation schedule in a financial model is a systematic calculation of the periodic reduction in the carrying value of a fixed asset over its useful economic life. The depreciation charge is expensed through the income statement each period, reducing EBITDA to operating profit (EBIT) and creating a non-cash charge that reduces taxable income. Two principal methods are used in financial models: straight-line depreciation (equal charge in each period) and reducing balance (declining charge in each period). The depreciation schedule feeds into three key statements: the income statement (depreciation charge), the balance sheet (net book value of assets), and the cash flow statement (depreciation added back as a non-cash item).

Key Takeaways

  • ✓ A depreciation schedule is the calculation within a financial model that determines the periodic charge for the reduction in a fixed asset's carrying value over its useful economic life.
  • ✓ Straight-line depreciation.
  • ✓ The depreciation schedule connects to three financial statements:
  • ✓ Depreciation creates a non-cash tax shield: because depreciation reduces taxable income, it reduces the tax payable in each period.

Definition

A depreciation schedule is the calculation within a financial model that determines the periodic charge for the reduction in a fixed asset's carrying value over its useful economic life. It is the mechanism by which the cost of a capital asset is spread across the periods in which it generates economic benefit, rather than being expensed in full in the period of acquisition.

Principal Depreciation Methods

Straight-line depreciation. The asset's cost (less any residual value) is divided equally across its useful life. Each period's depreciation charge is constant.

Annual Depreciation = (Cost − Residual Value) / Useful Life in Years

Reducing balance depreciation (declining balance). A fixed percentage is applied to the asset's net book value at the start of each period. The charge is highest in the first period and declines over time.

Depreciation in Period N = Opening Net Book Value × Depreciation Rate

The choice of method is typically determined by accounting standards (IFRS or GAAP as applicable) and by tax regulations (which may specify the allowable method for tax depreciation).

Role in the Financial Model

The depreciation schedule connects to three financial statements:

  1. Income Statement: depreciation charge is deducted from EBITDA to give EBIT (operating profit before interest and tax)
  2. Balance Sheet: the accumulated depreciation reduces the gross asset cost to the net book value
  3. Cash Flow Statement: depreciation is added back to net income in the operating section (because it is a non-cash charge)

Tax Impact

Depreciation creates a non-cash tax shield: because depreciation reduces taxable income, it reduces the tax payable in each period. In financial models, tax depreciation (which may differ from accounting depreciation) is separately calculated to determine the timing of the actual tax payment.

Common Errors in Depreciation Schedules

  • Applying the wrong useful life to an asset class
  • Failing to zero out the depreciation charge once the asset is fully depreciated
  • Using accounting depreciation rates for tax calculations (or vice versa) without distinguishing the two
  • Not including depreciation in the formula consistency check (depreciation formulas must be consistent across all periods)

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Prerequisites

  • IRR — the return metric affected by depreciation through tax timing
  • NPV — the value metric affected by the tax shield from depreciation
  • Capital Expenditure — the capex-to-PP&E-to-depreciation relationship feeding this schedule

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