Straight Line Depreciation Overview
Straight line depreciation is the default method used to gradually reduce the carrying amount of a fixed asset over its useful life. The method is designed to reflect the consumption pattern of the underlying asset, and is used when there is no particular pattern to the manner in which the asset is to be used over time. Use of the straight-line method is highly recommended, since it is the easiest depreciation method to calculate, and so results in few calculation errors.
Under the straight-line method of depreciation, recognize depreciation expense evenly over the estimated useful life of an asset. The straight-line calculation steps are:
- Determine the initial cost of the asset that has been recognized as a fixed asset.
- Subtract the estimated salvage value of the asset from the amount at which it is recorded on the books.
- Determine the estimated useful life of the asset. It is easiest to use a standard useful life for each class of assets.
- Divide the estimated useful life (in years) into 1 to arrive at the straight-line depreciation rate.
- Multiply the depreciation rate by the asset cost (less salvage value).
Once calculated, depreciation expense is recorded in the accounting records as a debit to the depreciation expense account and a credit to the accumulated depreciation account. Accumulated depreciation is a contra asset account, which means that it is paired with and reduces the fixed asset account.
Straight Line Depreciation Example
Pensive Corporation purchases the Procrastinator Deluxe machine for $60,000. It has an estimated salvage value of $10,000 and a useful life of five years. Pensive calculates the annual straight-line depreciation for the machine as:
- Purchase cost of $60,000 – estimated salvage value of $10,000 = Depreciable asset cost of $50,000
- 1 / 5-year useful life = 20% depreciation rate per year
- 20% depreciation rate x $50,000 depreciable asset cost = $10,000 annual depreciation