Lakeshore Print's new delivery van cost $60,000. In five years the business expects to sell it for about $6,000. So over its life the van will use up $54,000 of value, and the matching principle says that $54,000 should become expense across the five years the van helps earn revenue. The question this lesson answers is how much to expense each year. Should every year get the same amount? Should the early years, when the van is new and busiest, get more? Or should it depend on how far the van is actually driven? Each answer is a different amortization method, and each is acceptable when it reflects how the asset is really used up.
The language of amortization
- Cost: everything paid to get the asset ready for use (from the previous lesson).
- Residual value (salvage value): what the business expects to get for the asset at the end of its useful life.
- Useful life: how long the business expects to use the asset, in years or in units (kilometres, machine hours, units produced).
- Depreciable amount : the total that will be amortized over the asset's life.
- Accumulated Amortization: a contra-asset account that collects all the amortization recorded so far. It has a credit balance and is subtracted from the asset's cost.
- Book value (carrying amount)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec. 31, 2026 | Amortization Expense — Vehicles | $10,800 | |
| Accumulated Amortization — Vehicles | $10,800 | ||
| To record amortization on the delivery van for 2026 |
Three methods, one delivery van
The van was bought Jan. 2, 2026: cost $60,000, residual value $6,000, useful life 5 years or 150,000 km. Straight-line charges the same amount every year. Declining-balance multiplies the book value at the start of each year by a fixed rate, so the charge shrinks each year as book value falls. Lakeshore uses double the straight-line rate: (this version is called double-declining-balance). Units-of-output (units-of-production) charges a set amount for each kilometre driven.
| Year | Straight-line | Declining-balance (40%) | Units-of-output (km driven) |
|---|---|---|---|
| 2026 | $10,800 | $24,000 | $14,400 (40,000 km) |
| 2027 | $10,800 | $14,400 | $12,600 (35,000 km) |
| 2028 | $10,800 | $8,640 | $10,800 (30,000 km) |
| 2029 | $10,800 | $5,184 | $9,000 (25,000 km) |
| 2030 | $10,800 | $1,776 | $7,200 (20,000 km) |
| Total | $54,000 | $54,000 | $54,000 (150,000 km) |
Partial years: amortizing to the nearest month
Assets are rarely bought on the first day of the fiscal year. To match the expense to the months the asset was actually used, the first year's amortization is pro-rated to the nearest whole month. A common rule: an asset bought on or before the 15th of a month counts that whole month; one bought after the 15th starts the next month. The same idea applies in the year an asset is sold. Units-of-output needs no adjustment, because it already uses the actual units for the period. For declining-balance, only the first year is pro-rated: from the second year on, take the full rate times the opening book value, which already reflects the smaller first-year charge.
Comparing the methods on the financial statements
| 2026 result | Straight-line | Declining-balance | Units-of-output |
|---|---|---|---|
| Amortization expense | $10,800 | $24,000 | $14,400 |
| Net income | $69,200 | $56,000 | $65,600 |
| Book value of van, Dec. 31 | $49,200 | $36,000 | $45,600 |
- Declining-balance gives the highest expense, lowest net income and lowest book value in the early years, and the reverse in later years. It suits assets that are most productive when new or lose value quickly (vehicles, computers).
- Straight-line gives steady expense and net income every year. It suits assets used evenly over time (buildings, furniture). It is the simplest and the most common.
- Units-of-output makes expense rise and fall with activity. It suits assets whose wear depends on use (vehicles by kilometre, machines by hours).
- Over the whole life, every method expenses the same depreciable amount, and none of them changes cash. Amortization is a non-cash expense.
- Standards require the method to reflect the pattern in which the asset's benefits are used up, and the consistency principle requires sticking with that method from year to year so statements can be compared.
- For income tax, the CRA uses its own separate system called capital cost allowance (CCA). The amortization in the financial statements does not have to match it.