How to Calculate Straight Line Depreciation Formula

define straight line depreciation

When a fixed asset’s obsolescence is simply the result of time passing, straight-line depreciation is an appropriate method. Furniture and fixtures are good examples of fixed assets that simply lose value as they age. Straight-line depreciation is also fitting in scenarios where the economic usefulness of an asset, such as a warehouse, is the same in each time period. Also, if revenue generated by the fixed asset is constant over the useful life, the straight-line method may be the best choice, such as for a building owned for rental by a landlord. The sum-of-the-years’ digits method is another accelerated depreciation method that takes into account the increasing cost of an asset as it wears down or becomes obsolete.

define straight line depreciation

Taking a step back, the concept of depreciation in accounting stems from the purchase of PP&E – i.e. capital expenditures . The machinery has an estimated salvage value of £1,000 and an expected useful life of ten years. But, you don’t have to do it yourself, especially if you run a large company with many assets that are liable to depreciation.

Straight line depreciation example

Start with the purchase price—or the amount you paid to acquire the asset. This includes its shipping rate, installation fees, and other costs. Depreciation can result in larger than anticipated capital gains taxes if the property is sold and doesn’t always accurately reflect what it costs to maintain a property. However, the consistent deduction of straight-line depreciation offsets a significant amount of taxable income by functioning as a paper loss and spreads that deduction over many tax years. To calculate straight line depreciation for an asset, you need the asset’s purchase price, salvage value, and useful life. The salvage value is the amount the asset is worth at the end of its useful life.

For example, assume you just purchased 15 new office desks for your employees. You expect to resell each desk for $20, or $300 total, at the end of seven years. To calculate the straight-line depreciation, define straight line depreciation you subtract $300 from $4,500 and divide by 7. Each year, for seven years, you will record $600 of depreciation. As buildings, tools and equipment wear out over time, they depreciate in value.

Related Definitions

Whereas the depreciable base is the purchase price minus the salvage value. Depreciation continues until the asset value declines to its salvage value. Whether you’re creating a balance sheet to see how your business stands or an income statement to see whether it’s turning a profit, you need to calculate depreciation.

Estimates and judgment are required for the purpose of allocating costs in a systematic and rational manner. In other words, it is a systematic way of calculating depreciation deductions in equal amounts for each unit of the asset during its useful life. Straight-line depreciation is a very useful method that allows one to depreciate an asset evenly over time at a set rate. The Modified Accelerated Cost Recovery System is the current depreciation schedule for assets placed in service after 1986.

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Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on According to straight-line depreciation, your MacBook will depreciate $300 every year. Its scrap or salvage value of the asset—the price you think you can sell it for at the end of its useful life. Typically, the salvage value (i.e. the residual value that that asset could be sold for) at the end of the asset’s useful life is assumed to be zero.

What is depreciation vs straight line depreciation?

Depreciation expense reduces a business' profit on its income statement. While the straight-line method reduces profit by the same amount each accounting period, the other two methods cause a company's profit to fluctuate with all else being equal.

Whilst there are several other depreciation methods, the straight-line approach is the easiest to understand and is suitable for the needs of small businesses and freelancers. The estimated useful life value used in our calculations are for illustration purposes. If you are calculating depreciation value for tax purposes, you should get the accurate, useful life figure from the Internal Revenue Agency . The other popular methods used in calculating depreciation value are; Sum of years method or unit of production method and double declining balance method. Still, the straight-line depreciation method is widely employed for its simplicity and functionality to determine the depreciation of assets being used over time without a particular pattern. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date.

If the basis has been brought down to $0, then the entire amount of the sale would be considered a taxable capital gain. Depreciation refers to the loss of value of an item, known as a fixed asset, over time. You would move $5,000 from the cash and cash equivalents line of the balance sheet to the property, plant, and equipment line of the balance sheet. Are you a new small business owner looking to understand your tax return a little more?

define straight line depreciation

This creates a smaller tax deduction that applies each year for a certain period. Straight line basis, also called straight line depreciation, refers to a measure of determining depreciation and amortization on assets. It is one of the easiest ways to ascertain the decrease in an assets value over a given period of time.


Then divide the resulting figure by the total number of years the asset is expected to be useful, referred to as the useful life in accounting jargon. The straight line depreciation formula is a simple way of calculating the cost of an asset over time. It’s calculated by subtracting the salvage value of an asset from its cost. This is then divided by the estimated projected useful lifetime of the asset. While it’s simple to calculate straight line depreciation, there are drawbacks, such as possible inaccuracies with the projected estimated useful lifetime of the asset in question. A fixed asset is an asset that will be used for a long period of time.

  • For example, assume you just purchased 15 new office desks for your employees.
  • Straight line method is easy to understand, and has less probability of having errors during the asset life.
  • It is easiest to use a standard useful life for each class of assets.
  • According to straight-line depreciation, this is how much depreciation you have to subtract from the value of an asset each year to know its book value.
  • Therefore, depreciation would be higher in periods of high usage and lower in periods of low usage.

What is straight line depreciation formula?

What is the Formula for Calculating Straight Line Depreciation? The formula for calculating straight line depreciation is: Straight line depreciation = (cost of the asset – estimated salvage value) ÷ estimated useful life of an asset.