Straight line depreciation method is one of the most simple and frequently used depreciation methods for allocating the cost of a capital asset across its useful life. It assumes that the value of the asset is depreciated equally each year over its lifespan until it reaches its salvage value.
Straight Line Depreciation FormulaThe formula for calculating the depreciation expense of an asset using the straight line depreciation method is as follows: Annual Depreciation Expense = (Cost of the Asset - Salvage Value) / Useful Life of Asset Where: Cost of the asset refers to the price at which the asset is purchased at Salvage value is the residual value of the asset at the end of its useful life. Useful life of asset refers to the time period which the asset can create value for the company.
Steps To Calculating Straight Line Depreciation
- Determine the cost of the asset.
- Deduct the salvage value of the asset from the cost of the asset to calculate total depreciable amount.
- Determine the useful life of the asset.
- Divide total depreciable amount by the number of useful life to calculate the annual depreciation expense.
Other Depreciation MethodsBesides straight line method, there also few other ways to calculate depreciation expenses. Depending on the business nature and industry, companies may choose one method over another to gain tax or cash flow benefits. Double-declining balance method is a type of accelerated depreciation method. Using this method, the asset will be depreciated faster and depreciation expenses will be higher in the first years of the asset's useful life and lower in later years. Units of production method calculates depreciation based on the asset's usage, activity, or parts produced. Higher usage will result in higher depreciation expense, and vice versa.
Learn More On This TopicRead CFI's article to learn the formula and steps to calculating the depreciation expenses using the straight line depreciation approach. Feel free to also check out other accounting templates and finance templates available on CFI Marketplace.