What Is Straight Line Depreciation?
The default method used to gradually reduce the carrying amount of a fixed asset over its useful life is called Straight Line Depreciation. Each full accounting year will be allocated the same amount of the percentage of asset’s cost when you are using the straight-line method of depreciation.
This method was created to reflect the consumption pattern of the underlying asset. It is used when there no particular pattern to the manner in which the asset is being used over time. Since it is the easiest depreciation method to calculate and results in the fewest calculation errors, using straight line depreciation to calculate an asset’s depreciation is highly recommended.
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How Do You Calculate Straight Line Depreciation?
When you use the straight-line method of depreciation it represents the depreciation expense evenly over the estimated full life of a fixed asset. The calculation to get straight-line depreciation is as follows:
- Determine the initial cost of the asset that has been recognized as a fixed asset
- Subtract the estimated salvage value (the estimated resale value of an asset at the end of its useful life) of the asset. It easiest to use standard use of life for each class of assets
- 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 full 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)
What Is an Example of Straight Line Depreciation?
A business purchases a machine for $60,000. It has an estimated salvage value of $10,000 and a useful life of five years. The business 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
What Is Straight Line Depreciation in Accounting?
In your accounting records, straight-line depreciation can be recorded as a debit to the depreciation expense account and a credit to the accumulated depreciation account. Accumulated depreciation is a contra asset account, so it is paired with and reduces the fixed asset account.