Straight Line Depreciation

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Straight Line Depreciation Overview

Under the straight line depreciation method, you recognize depreciation expense evenly over the estimated useful life of an asset. This is the simplest and most easily understandable depreciation method. Its considerable level of simplicity also reduces the risk of calculation errors.

It is employed for those assets that are expected to be used at a consistent rate over their useful lives. A company that instead has assets likely to be used more heavily earlier in their useful lives might consider using an accelerated depreciation method, to more accurately reflect the asset usage pattern.

Formula:

a. Compute the straight-line depreciation rate as

1
-------------------------
Estimated useful life

b. Multiply the depreciation rate by the cost less estimated salvage value.

Straight Line Depreciation Example

ABC Company purchases a machine for $100,000. It has an estimated salvage value of $10,000 and a useful life of five years. The straight-line depreciation calculation is:

Step 1: 1 / 5 years = 20% depreciation per year

Step 2: 20% x ($100,000 cost - $10,000 salvage value) = $18,000 annual depreciation