How to Calculate Straight Line Depreciation Formula

Learning and using this simple formula can help reduce tax obligations, improve accounting methods, and make it easier to see current business value. The reliability and consistency of the formula also helps to streamline processes straight line depreciation and simplify an accountant’s work, even if they’re unfamiliar with the company and its previous tax reports. To calculate straight line depreciation for an asset, you need the asset’s purchase price, salvage value, and useful life.

You would charge $1,600 to the income statement each year for three years. You’d actually show profits reduced by $1,600 in year one, by $1,600 in year two, and by $1,600 in year three, even though you parted with $5,000 in year one and $0 each year thereafter. The calculation is straightforward and it does the job for a majority of businesses that don’t need one of the more complex methodologies. Here, we are simply taking an average of the useful value of the asset over its useful life. The useful life can be of any frequency, be it years, quarters, months, etc., but remember then that the depreciation value will be the value per period. If the capital expenditure is incurred the depreciation is to be recalculated prospectively.

Straight-Line Depreciation Method

The straight line depreciation method calculates the computer will depreciate $200 every year. When the organization sells the assets before the life of assets comes to an end so as to calculate the accurate profit or loss. In our example, the title transfers, which means at the end of the lease term the lessee will own the asset and continue depreciating it. However, the useful life of the equipment in this example equals the lease term so at the end of the lease, the asset will be depreciated to $0. Now, let’s consider a full example of a finance lease to illustrate straight-line depreciation expense. Below we will describe each method and provide the formula used to calculate the periodic depreciation expense.

But, you don’t have to do it yourself, especially if you run a large company with many assets that are liable to depreciation. You can always hire a professional accountant solution to handle this part of your business. November and December therefore only two month’s depreciation will calculated on proportionate basis out of total 12. Calculate depreciation for the first year using straight-line method if asset was acquired on first November and December 31 is financial year end. Any asset that brings value to the company tends to lose its worth as time passes.

How Is It Different from Other Methods of Depreciation?

This equipment type loses value based on the amount it is used instead of the years it has been in service. To calculate the depreciation, subtract the scrap value from the purchase price and, instead of dividing by the years of life, multiply by the number of units produced. This unit-of-production method works best when used with assets that are rated by the number of specific items they produce and not the amount of time they are used. Double declining balance is the most widely used declining balance depreciation method, which has a depreciation rate that is twice the value of straight line depreciation for the first year.

• Straight Line Depreciation Method is a highly recommended method as it is the easiest method for calculating Depreciation.
• Using the same figure year after year keeps the bookwork simple and enables the quick calculation of expenses and deductions.
• Businesses that own many costly assets with a long useful life will find the straight line depreciation method helpful.
• Buildings and leasehold improvements are depreciated over 7 to 40 years.
• With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support.
• Straight line method of depreciation is one of the methods of depreciation in which the amount of depreciation is constant over the life of the asset.

It also does not cause variation in the Profit and Loss Statement of each year as Depreciation is provided uniformly over its useful life. It can be observed in the above https://www.bookstime.com/ graph, that the depreciation amount remains constant over a period of time and only the written down value of the asset decreases due to depreciation charged .

Straight Line Depreciation Method

She has expertise in finance, investing, real estate, and world history. Kirsten is also the founder and director of Your Best Edit; find her on LinkedIn and Facebook. Note how the book value of the machine at the end of year 5 is the same as the salvage value.

It is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset. The estimated useful life value used in our calculations are for illustration purposes. If you are calculating depreciation value for tax purposes, you should get the accurate, useful life figure from the Internal Revenue Agency .