Straight Line Depreciation

Posted On February 27, 2023

straight line method of depreciation

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each Virtual Accounting Making the Switch year. The total amount of depreciation is $105,000 divided by five years (i.e., $21,000 per year). Furthermore, depreciation is often calculated monthly or quarterly for the preparation of interim statements. Sally can now record straight line depreciation for her furniture each month for the next seven years.

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. Book value refers to the total value of an asset, taking into account how much it’s depreciated up to the current point in time. As buildings, tools and equipment wear out over time, they depreciate in value. Being able to calculate depreciation is crucial for writing off the cost of expensive purchases, and for doing your taxes properly. Try to use common sense when determining the salvage value of an asset, and always be conservative. Don’t overestimate the salvage value of an asset since it will reduce the depreciation expense you can take.

Straight-Line Method of Depreciation FAQs

Let’s say, for instance, that a hypothetical company has just invested $1 million into long-term fixed assets. The straight-line method of depreciation can be used to depreciate almost any type of tangible assets such as property, furniture, computers, and equipment. Also, since the asset had an estimated useful life of 10 years, the depreciation expense each year was 1/10 of the depreciable amount. There are good reasons for using both of these methods, and the right one depends on the asset type in question. The straight-line depreciation method is the easiest to use, so it makes for simplified accounting calculations.

What is the formula for a straight line?

The equation of a straight line is y=mx+c y = m x + c m is the gradient and c is the height at which the line crosses the y -axis, also known as the y -intercept.

The double-declining balance method results in higher depreciation expenses in the beginning of an asset’s life and lower depreciation expenses later. 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. Let’s say, a company purchases a machinery of $10,500 with a useful life of 10 years, and a salvage or scrap value of $500.

How to calculate straight-line depreciation

Depreciation for each time period (timescale units) will be calculated by dividing acquisition cost by depreciation period. If asset has salvage value, it should be considered while calculating depreciation. Straight-line depreciation is the simplest of the various depreciation methods.

The accountant should deduct salvage value of the machinery from its original price, and divide the amount with it’s useful life. Using the straight line basis method, the depreciation for the machinery will be $1,000 (($10,500 – $500) / 10). This states that instead of writing off the complete machinery cost in the existing time period, the company will have a depreciation expense of $1,000. The company will record $1000 as an expense in contra-account, which is also known as accumulated depreciation until the salvage value of $500 will be left in the accounting books.

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