A Plain English Guide to the Straight Line Depreciation Method

It does not back out the salvage value in the original calculation, so care must be taken to not depreciate the asset beyond its salvage value in the final year. The straight line depreciation method is used to calculate the annual depreciation expense of a fixed asset. Straight-line depreciation is the simplest of the various depreciation methods. Under this method, yearly depreciation is calculated by dividing an asset’s depreciable cost by its estimated useful life. ​Straight line depreciation is a commonly used method of calculating the depreciation expense of an asset over its useful life.

Advantages and Disadvantages of Straight Line Basis

So using the example above, the cost was 10,000, salvage value 1,000 and useful life 3 years. Second, once the book value or initial capitalization costs of assets are identified, we need to identify the salvages value or the scrap value of assets at the end of the assets’ useful life. Previously, your company upgraded its hardware every three years despite accounting rules allowing computers to last for five years at most. In your opinion, three years is a more realistic estimate of the computer’s useful life since you will probably dispose of it at that point.

Straight line depreciation loses some of its appeal when it is applied to high dollar value assets that may depreciate at an uneven rate. For example, when you drive a new vehicle off the lot, it loses most of its value in the first few years. An even application of depreciation expense is not appropriate in this circumstance. Straight line depreciation is also not ideal for assets that may have multiple additions or expansions in the future– such as buildings and machinery. An asset’s useful life is the length of time over which a company expects the asset to continue to remain useful– to provide a benefit to the business.

Accountants commonly use the straight-line basis method to determine this amount. The group and composite methods simplify depreciation for businesses managing many similar or diverse assets. Instead of calculating depreciation for each item, these methods aggregate assets into a group or composite. In financial reporting, straight-line depreciation is recognized under both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

How is straight-line method of depreciation calculated?

But depreciation using DDB and the units-of-production method may change each year. The depreciation per unit is the depreciable base divided by the number of units produced over the life of the asset. In this case, the depreciable base is the $50,000 cost minus the $10,000 salvage value, or $40,000. Using the units-of-production method, we divide the $40,000 depreciable base by 100,000 units. To calculate using this method, first subtract the salvage value from the original purchase price.

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In addition, there is a loss of $8,000 recorded on the income statement because only $65,000 was received for the old trailer when its book value was $73,000. Straight-line depreciation is the simplest method of calculating depreciation for a fixed asset, such as computer hardware, equipment or a car. Depreciation is a reduction of a fixed asset’s value over the time the asset is used. And with the straight line depreciation method, the asset’s value is reduced by the same amount each year until the end of its useful life.

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All of these uses contribute to the revenue those goods generate when they are sold, so it makes sense that the trailer’s value is charged a bit at a time against that revenue. The difference between declining balance (known as diminishing value depreciation in Australia) and straight-line depreciation is that diminishing value writes off a higher value in the first few years. Straight-line depreciation means you claim the same amount every year. You estimate the salvage value will be $2000, so the depreciation expense is now $4000.

No, the salvage value is an estimated amount that the asset can be sold for at the end of its useful life. It may not always be equal to the residual value (the remaining value of the asset after deducting depreciation). Automated accounting software, such as Viindoo Accounting, offers an effective solution to these challenges. It simplifies and streamlines the depreciation process, reducing the potential for errors, and allowing employees to focus on more value-added tasks. Calculate depreciation expense what is straight line depreciation for the years ending 30 June 2013 and 30 June 2014. E.g. rate of depreciation of an asset having a useful life of 8 years is 12.5% p.a.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. Here’s a hypothetical example to show how the straight-line basis works. The equipment has an expected life of 10 years and a salvage value of $500. Note how the book value of the machine at the end of year 5 is the same as the salvage value.

• With a book value of $73,000, there is now only $56,000 left to depreciate over seven years, or $8,000 per year.
• That boosts the income statement by $3,750 per year, all else being the same.
• It simplifies and streamlines the depreciation process, reducing the potential for errors, and allowing employees to focus on more value-added tasks.

The total accumulated depreciation at the end of the asset’s useful life will be the same as an asset depreciated under the straight line method. However, an asset depreciated using the double declining balance method will have depreciation expense taken over a smaller number of years than one depreciated using straight line depreciation. The straight line depreciation method ensures assets are accurately accounted for in a business’ financial statements.

For example, machinery purchased for $100,000 with a salvage value of $10,000 and a 10-year useful life would have an annual depreciation expense of $9,000. This method is well-suited for assets with uniform usage, such as office furniture or buildings. Instead, the cost is placed as an asset onto the balance sheet and that value is steadily reduced over the useful life of the asset.