Straight-Line Method of Assets Depreciation Explanation & Formula

To calculate the depreciation rate, divide the depreciation expense by the depreciable base. To find the depreciation expense using the deprecation rate, multiply the depreciable base by the depreciation rate. Hence, it’s just a straight line in the graph and the reason the method got its name. Over time, the book value decreases because of annual depreciation expense charges. Take the purchase price or acquisition cost of an asset, then subtract the salvage value at the time it’s either retired, sold, or otherwise disposed of. Now divide this figure by the total product years the asset can reasonably be expected to benefit your company.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Typically, the salvage value (i.e. the residual value that that asset could be sold for) at the end of the asset’s useful life is assumed to be zero. Are reduced by $ and moved to the Property, straight line depreciation calculation plant, and equipment line of the balance sheet. As seen from the above table – At the end of 8 years, i.e., after its useful life is over, the machine has depreciated to its salvage value. Determine the initial cost of the asset at the time of purchasing.

Pros and cons of the straight line depreciation formula

Hence, the Company will depreciate the machine by $1000 annually for eight years. Is the initial purchase or construction cost of the asset as well as any related capital expenditure. Brainyard delivers data-driven insights and expert advice to help businesses discover, interpret and act on emerging opportunities and trends. Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. A half-year convention for depreciation is a depreciation schedule that treats all property acquired during the year as being acquired exactly in the middle of the year.

From buildings to machines, equipment and tools, every business will have one or more fixed assets likely… A fixed asset account is reduced when paired with accumulated depreciation as it is a contra asset account. Accountants use straight-line depreciation because it is easy to calculate, is less of an administrative burden and is less prone to error. It is also the most fitting choice for fixed assets that become obsolete as they age with the simple passage of time.

What Is the Straight-Line Method?

Check out our guide to Form 4562 for more information on calculating depreciation and amortization for tax purposes. Straight-line depreciation is a simple method for calculating how much a particular fixed asset depreciates over time. Though straight-line depreciation is used for the majority of assets, there are other methods for calculating depreciation that may be more accurate in particular situations. Below we’ve summarized the two most common alternative methods for calculating depreciation and reasons one might choose to use each. We can also calculate the depreciation rate, given the annual depreciation amount and the total depreciation amount, which is the annual depreciation amount/total depreciation amount.

• Each depreciation expense is reported on the income statement for the accounting period, and most businesses report on a 12 month accounting period.
• The straight-line depreciation method is a common way of allocating “wear and tear” to the cost of an item over its lifespan.
• Contra AccountContra Account is an opposite entry passed to offset its related original account balances in the ledger.
• No single depreciation method is perfect, but each one has its own set of benefits and limitations.
• Additionally, the consistent charges assist operating profitability and cash flow analysis, since they are easily identified and removed.