What is straight-line depreciation: Formula & Examples 2025

Publicado em 30 de janeiro de 2025

Modifying depreciation methods and schedules manually on spreadsheets can be time-consuming. However, switching to fixed asset management software can help you simplify the process. Straight-line depreciation allows you to distribute the cost of assets evenly over their useful lives, which helps in matching expenses with revenue generated from those assets. Plus, with this method, depreciation expenses remain consistent, simplifying financial planning and budgeting.

• The estimated period over which an asset is expected to be used, known as its useful life, is vital in calculating straight-line depreciation.
• The allocation of the cost of a plant asset to expense in an accelerated manner.
• Each year the credit balance in this account will increase by $10,000 until the credit balance reaches $70,000.
• This number will show you how much money the asset is ultimately worth while calculating its depreciation.

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11 Financial’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Download CFI’s free Excel template now to advance your finance knowledge and perform better financial analysis. Therefore, Company A would depreciate the machine at the amount of $16,000 annually for 5 years.

SYD is An Accelerated Method of Depreciation

This may not be true for all assets, in which case a different method should be used. To calculate depreciation using a straight-line basis, simply divide the net price (purchase price less the salvage price) by the number of useful years of life the asset has. An alternative to straight-line depreciation is the declining balance method, straight line depreciation example where the value of the asset is reduced by a percentage rather than a fixed amount.

Depreciation already charged in prior periods is not revised in case of a revision in the depreciation charge due to a change in estimates. Now, let’s assume you run a large fishing business that sets out on the Bering Sea every summer to capture fresh salmon. Next, you’ll estimate the cost of the salvage value by considering how much the product will be worth at the end of its useful life span. Now that you know what straight-line depreciation is and why it’s important, let’s look at how to calculate it. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. Finance Strategists has an advertising relationship with some of the companies included on this website.

Straight-Line Method of Depreciation FAQs

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. This method first requires the business to estimate the total units of production the asset will provide over its useful life. Then a depreciation amount per unit is calculated by dividing the cost of the asset minus its salvage value over the total expected units the asset will produce.

Other Methods of Depreciation

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. Therefore, the DDB depreciation calculation for an asset with a 10-year useful life will have a DDB depreciation rate of 20%. In the first accounting year that the asset is used, the 20% will be multiplied times the asset’s cost since there is no accumulated depreciation. In the following accounting years, the 20% is multiplied times the asset’s book value at the beginning of the accounting year.

It is upon the accounting method followed by the company and also the type of asset that has to be depreciated. In the article, we have seen how the straight-line depreciation method can depreciate the asset’s value over the useful life of the asset. It is the easiest and simplest method of depreciation, where the asset’s cost is depreciated uniformly over its useful life. Straight-line depreciation is often the easiest and most straightforward way of calculating depreciation, which means it can potentially result in fewer errors. However, while straight-line depreciation is widely used and often preferred for its simplicity, it may not always be the most accurate method for all types of assets or situations.

In the U.S. companies are permitted to use straight-line depreciation on their income statements while using accelerated depreciation on their income tax returns. A significant change in the estimated salvage value or estimated useful life will be reported in the current and remaining accounting years of the asset’s useful life. The most common method of depreciation used on a company’s financial statements is the straight-line method. When the straight-line method is used each full year’s depreciation expense will be the same amount.

This process requires some actual data as well as some estimations, which directly involves the financial statements of the business. The straight-line method of depreciation isn’t the only way businesses can calculate the value of their depreciable assets. While the straight-line method is the easiest, sometimes companies may need a more accurate method. The statement of cash flows (or cash flow statement) is one of the main financial statements (along with the income statement and balance sheet).

Debits and credits: Definition, examples, and accounting basics

The depreciation for the 2nd year will be 9/55 times the asset’s depreciable cost. This pattern will continue and the depreciation for the 10th year will be 1/55 times the asset’s depreciable cost. The double-declining-balance (DDB) method, which is also referred to as the 200%-declining-balance method, is one of the accelerated methods of depreciation. DDB is an accelerated method because more depreciation expense is reported in the early years of an asset’s life and less depreciation expense in the later years. To introduce the concept of the units-of-activity method, let’s assume that a service business purchases unique equipment at a cost of $20,000.

The amount of a long-term asset’s cost that has been allocated to Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment. To calculate the straight-line depreciation expense of this fixed asset, the company takes the purchase price of $100,000 minus the $30,000 salvage value to calculate a depreciable base of $70,000.