The Straight Line Depreciation Method

Straight Line Depreciation

The machinery has an estimated salvage value of £1,000 and an expected useful life of ten years. Calculate the estimated useful life of the asset – this is how many years the asset is expected to remain functional and fit-for-purpose. When the equipment is at the end of its useful life, its carrying value will be $2,000. If you sell the equipment for more than the salvage value, you have to record a profit in the income statement. However, if you sell the equipment at the end of its useful life for less than the salvage value, you will need to record this as a loss.

  • For example, there is always a risk that technological advancements could potentially render the asset obsolete earlier than expected.
  • After this, the sale price will be included back into cash and cash equivalents.
  • If you mark the expense as an asset, you will then be prompted to enter an estimated useful live and residual value.
  • Straight-line depreciation is most commonly used by businesses and corporations that wish to determine the value of an asset over an extended period of time.
  • Once you know the yearly depreciation rate, you can simply subtract the depreciation value from the purchase price each year to determine the asset’s current value at any point in time.

This means that there will not be a carrying value in your balance sheet’s fixed asset line. The carrying value would be $200 on the balance sheet at the end of three years. The depreciation expense would be completed under the straight line depreciation method, and management would retire the asset. The sale price would find its way back to cash and cash equivalents.

Step 2: Find And Subtract Any Salvage Value From The Asset’s Cost

Unlike more complex methodologies, such as double declining balance, a straight line is simple and uses just three different variables to calculate the amount of depreciation each accounting period. Straight-line depreciation is the most common method of allocating the cost of a plant asset to expense in the accounting periods during which the asset is used. With the straight-line method of depreciation, each full accounting year will report the same amount of depreciation.

  • But unlike Straight-line depreciation, the depreciable cost of the asset is lowered each year by subtracting the previous year’s depreciation.
  • Depreciation is how you record the decrease in value of a tangible asset over its useful life.
  • That deferred tax asset will be reduced over time until the reported income under GAAP and the reported income to the IRS align at the end of the straight line depreciation schedule.
  • Continue reading to find out more about the well-known straight line depreciation method, how it’s calculated, and how it can help a business.
  • Divide this number by the total number of years you expect the product to benefit your organization (the asset’s useful life).
  • Retained earnings are the profits that remain in your business after all expenses have been paid and all distributions have been paid out to shareholders.

This method calculates more depreciation expenses in the beginning and uses a percentage of the book value of the asset instead of the initial cost. With the declining balance method, the quantity of depreciation reduces over time and carries on until it reaches its salvage value.

Step 1: Calculate The Cost Of The Asset

These methods can be more accurate when dealing with items such as computers or vehicles, since those tend to lose the most value within the first few years of use. A business owner might use straight-line depreciation to find the annual depreciation expense of a piece of office equipment. The business owner can then deduct a set amount from the business’ taxes each year. Just about any major piece of tangible property as well as some intangible propertycan be depreciated over time. Examples of tangible property may include buildings, production machinery, computer and technology systems, transportation vehicles, and furniture. According to the Internal Revenue Service, businesses may also depreciate particular intangible assets like copyrights, computer software, and patents. Another way to calculate the depreciation of assets is the units of production method.

In this article, we explain what straight-line depreciation means, when it is used, how to calculate straight-line depreciation and examples of using this depreciation method in business. The depreciation rate is the rate an asset is depreciated each period.

Quick Review Of Assets And Expenses

Gross profit is a key profitability figure for a small business. It’s calculated by subtracting cost of goods sold from sales revenue.

  • It is easiest to use a standard useful life for each class of assets.
  • For a more accelerated depreciation method see, for example, our Double Declining Balance Method Depreciation Calculator.
  • Getting tax return and payment filing done on time is easier when you know what to expect and when they are due.
  • The value of an asset should always depreciate to its salvage value.
  • You can then depreciate key assets on your tax income statement or business balance sheet.

Using this method, the cost of a tangible asset is expensed by equal amounts each period over its useful life. The idea is that the value of the assets declines at a constant rate over its useful life.

Straight Line Depreciation Template

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The IRS updates Straight Line Depreciation IRS Publication 946 if you want a complete list of all assets and published useful lives.

Straight Line Depreciation

The salvage value is the amount the asset is worth at the end of its useful life. Whereas the depreciable base is the purchase price minus the salvage value. Depreciation continues until the asset value declines to its salvage value. After dividing the $1 million purchase cost by the 20-year useful life assumption, we get $50k as the annual depreciation expense.

Straight line depreciation is used to calculate the depreciation, or loss of value over time, of fixed assets that will gradually lose their value. Straight-line depreciation can be used to find the annual depreciation expense of an item, such as an air conditioner, that is purchased for a rental house. The owner of the house can deduct a set amount of the cost of the air conditioner each year on his or her taxes. 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. Under the straight-line method of depreciation, the cost of a fixed asset is spread evenly for each year that it is useful, functional and profitable.

Retiring Assets

With straight-line depreciation, you must assign a “salvage value” to the asset you are depreciating. The salvage value is how much you expect an asset to be worth after its “useful life”. And, a life, for example, of 7 years will be depreciated across 8 years. Subtract the estimated salvage value of the asset from the amount at which it is recorded on the books. 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.

Depreciation would also need to be calculated when creating a balance sheet to show how the business is doing as a whole. Businesses that own many costly assets with a long useful life will find the straight line depreciation method helpful.

Straight Line Depreciation

This chart demonstrates an asset depreciating between January 2018 and January 2029, showing a useful life of 11 years. The information contained in this article is general in nature and you should consider whether the information is appropriate to your needs.

Buildings and leasehold improvements are depreciated over 7 to 40 years. Joshua Kennon co-authored “The Complete Idiot’s Guide to Investing, 3rd Edition” and runs his own asset management firm for the affluent. Divide this number by the total number of years you expect the product to benefit your organization (the asset’s useful life). The easiest way to determine the useful life of an asset is to refer to the IRS tables, which are found in Publication 946, referenced above. If you don’t expect the asset to be worth much at the end of its useful life, be sure to figure that into the calculation.

Straight Line Depreciation Method

Thus, the depreciation expense in the income statement remains the same for a particular asset over the period. As such, the income statement is expensed evenly, so is the value of the asset on the balance sheet. The carrying amount of the asset on the balance sheet reduces by the same amount. That deferred tax asset will be reduced over time until the reported income under GAAP and the reported income to the IRS align at the end of the straight line depreciation schedule.


The value of an asset should always depreciate to its salvage value. It is easiest to use the standard useful life for each class of assets. Because this method is easy and simple, therefore it suits firms that are small in size. That same car may be worth only $17,000 after one year, $14,000 after two years, and $11,000 after three years from when it was purchased. The value of the car here is said to be decreasing (i.e. depreciating) over time.

Also known as straight line depreciation, it is the simplest way to work out the loss of value of an asset over time. Accelerated depreciation methods apply a higher amount of depreciation at the beginning of an asset’s useful life and a lower amount of depreciation toward the end. As such, it “accelerates” the depreciation taken in earlier years. Your write-offs will be higher up front if you use an accelerated depreciation method. 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, you subtract $300 from $4,500 and divide by 7.


With straight-line depreciation, you can reduce the value of a tangible asset. Straight-line depreciation can be recorded as a debit to the depreciation expense account. It can also be a credit to your accumulated depreciation account. Accumulated depreciation is a contra asset account, so it is paired with and reduces the fixed asset account.

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