Calculating Straight-Line Depreciation

It is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset. While the purchase price of an asset is known, one must make assumptions regarding the salvage value and useful life. These numbers can be arrived at in several ways, but getting them wrong could be costly. Also, a straight line basis assumes that an asset’s value declines at a steady and unchanging rate. This may not be true for all assets, in which case a different method should be used. As a business owner, knowing How To Calculate Straight Line Depreciation of your company’s fixed assets is crucial to your business’s success.

The units of production method is based on an asset’s usage, activity, or units of goods produced. Therefore, depreciation would be higher in periods of high usage and lower in periods of low usage. This method can be used to depreciate assets where variation in usage is an important factor, such as cars based on miles driven or photocopiers on copies made. With the straight line depreciation method, the value of an asset is reduced uniformly over each period until it reaches its salvage value. Straight line depreciation is the most commonly used and straightforward depreciation method for allocating the cost of a capital asset.

What are Other Types of Depreciation Methods?

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. Straight-line depreciation is a simple method for calculating how much a particular fixed asset depreciates (loses value) over time. Depreciation is a way to account for the reduction of an asset’s value as a result of using the asset over time.

• Straight line basis is calculated by dividing the difference between an asset’s cost and its expected salvage value by the number of years it is expected to be used.
• Other assets lose their value in a steady manner (furniture or real estate are good examples), so it makes more sense to use straight-line depreciation in these cases.
• This results in an annual depreciation expense over the next 10 years of $7,000.
• Since the equipment is a tangible item the company now owns and plans to use long-term to generate income, it’s considered a fixed asset.
• This is especially important for businesses that own a lot of expensive, long-term assets that have long useful lives.

You would also credit a special kind of asset account called an accumulated depreciation account. These accounts have credit balance (when an asset has a credit balance, it’s like it has a ‘negative’ balance) meaning that they decrease the value of your assets as they increase. Depreciation expense represents the reduction in value of an asset over its useful life. Multiple methods of accounting for depreciation exist, but the straight-line method is the most commonly used. This article covered the different methods used to calculate depreciation expense, including a detailed example of how to account for a fixed asset with straight-line depreciation expense.

Example of Straight Line Depreciation

In a nutshell, the depreciation method used depends on the nature of the assets in question, as well as the company’s preference. Sara runs a small nonprofit that recently purchased a copier for the office. It cost $150 to ship the copier, and the taxes were $600, making the final cost of the copier $8,250.

One of the most obvious pitfalls of using this method is that the useful life calculation is based on guesswork. For example, there is always a risk that technological advancements could potentially render the asset obsolete earlier than expected. Moreover, the straight line basis does not factor in the accelerated loss of an asset’s value in the short-term, nor the likelihood that it will cost more to maintain as it gets older. The vehicle is estimated to have a useful life of 5 years and an estimated salvage of $15,000. Let’s break down how you can calculate straight-line depreciation step-by-step. We’ll use an office copier as an example asset for calculating the straight-line depreciation rate.

How Do You Calculate Straight Line Depreciation?

Depreciation generally applies to an entity’s owned fixed assets or to its leased right-of-use assets arising from lessee finance leases. The straight-line depreciation method makes it easy for you to calculate the expense of any fixed asset in your business. With straight-line depreciation, you can reduce the value of a tangible asset. Straight line depreciation is a common method of depreciation where the value of a fixed asset is reduced over its useful life.

• The vehicle is estimated to have a useful life of 5 years and an estimated salvage of $15,000.
• It represents the depreciation expense evenly over the estimated full life of a fixed asset.
• Accumulated depreciation is a contra asset account, which means that it is paired with and reduces the fixed asset account.
• Depreciation is a way to account for the reduction of an asset’s value as a result of using the asset over time.
• Straight line depreciation is the most commonly used and straightforward depreciation method for allocating the cost of a capital asset.

This method is used with assets that quickly lose value early in their useful life. A company may also choose to go with this method if it offers them tax or cash flow advantages. It’s used to reduce the carrying amount of a fixed asset over its useful life. With straight line depreciation, https://kelleysbookkeeping.com/everything-you-need-to-know-about-big-4-accounting/ an asset’s cost is depreciated the same amount for each accounting period. You can then depreciate key assets on your tax income statement or business balance sheet. In subsequent years, the aggregated depreciation journal entry will be the same as recorded in Year 1.