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Straight Line Method and Reducing Balance Method
Last Updated On: 27-Oct-2021Posted On: 27-Oct-2021
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What is Straight Line Depreciation?
With the straight line depreciation method, the value of an asset is reduced uniformly over each period until it reaches its [url=https://corporatefinanceinstitute.com/resources/knowledge/accounting/salvage-value/]salvage value[/url]. Straight line depreciation is the most commonly used and straightforward [url=https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-is-depreciation-expense/]depreciation method[/url] for allocating the cost of a [url=https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-of-assets/]capital asset[/url]. It is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset.
[url=https://courses.corporatefinanceinstitute.com/courses/learn-accounting-fundamentals-corporate-finance][img]https://cdn.corporatefinanceinstitute.com/assets/straight-line-depreciation-diagram.png[/img][/url]
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Straight Line Depreciation Formula
The straight line depreciation formula for an asset is as follows:
[img]https://cdn.corporatefinanceinstitute.com/assets/straight-line-depreciation2-300x50.png[/img]
Where:
Cost of the asset is the purchase price of the asset
Salvage value is the value of the asset at the end of its useful life
Useful life of asset represents the number of periods/years in which the asset is expected to be used by the company
Additionally, the straight line depreciation rate can be calculated as follows:
[img]https://cdn.corporatefinanceinstitute.com/assets/straight-line-depreciation3-300x51.png[/img]
How to Calculate Straight Line Depreciation
The straight line calculation steps are:
- Determine the cost of the asset.
- Subtract the estimated salvage value of the asset from the cost of the asset to get the total depreciable amount.
- Determine the useful life of the asset.
- Divide the sum of step (2) by the number arrived at in step (3) to get the[url=https://corporatefinanceinstitute.com/resources/knowledge/accounting/depreciation-schedule/] annual depreciation[/url] amount.
Straight Line Example
Company A purchases a machine for $100,000 with an estimated [url=https://corporatefinanceinstitute.com/resources/knowledge/accounting/salvage-value/]salvage value
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