The percentage is then applied to the cost less salvage value, or depreciable base, to calculate depreciation expense for the period. Accountants use the straight line depreciation method because it is the easiest to compute and can be applied to all long-term assets. However, the straight line method does not accurately reflect the difference in usage of an asset and may not be the most appropriate value calculation method for some depreciable assets. Accountants like the straight line method because it is easy to use, renders fewer errors over the life of the asset, and expenses the same amount every accounting period. Unlike more complex methodologies, such as double declining balance, straight line is simple and uses just three different variables to calculate the amount of depreciation each accounting period.
There are many advantages and disadvantages that should be considered when using the straight line method of depreciation. If you need more practice on this and other topics from your accounting course, visit Dummies.com to purchase Accounting For Dummies! Featuring the latest information on accounting methods and standards, the information in Accounting For Dummies is valuable for anyone studying or working in the fields of accounting or finance.
How do you calculate straight-line depreciation?
Further, the full depreciable base of the asset resides in the accumulated depreciation account as a credit. The straight line method of depreciation is one way of calculating this value. This method assigns a fixed amount of depreciation to each year of an asset’s life, which results in an even rate of decline over time. It is calculated by dividing the asset’s cost by its useful life, which results in a fixed annual depreciation amount.
Value of asset is the value at which the asset is recorded in the balance sheet. One method accountants use to determine this amount is the straight line basis method. In accounting, there are many different conventions that are designed to match sales and expenses to the period in which they are incurred. One convention that companies embrace is referred to as depreciation and amortization.
Straight Line Depreciation
The company will calculate the annual depreciation expense by dividing the cost of the car ($10,000) by the useful life of the car (5 years), which gives an annual depreciation expense of $2,000 per year. There are many other methods of calculating depreciation, such as the declining balance method and the sum-of-the-years’ digits method. However, the straight line method is one of the most common and widely used ways to calculate depreciation.
- In accounting, there are many different conventions that are designed to match sales and expenses to the period in which they are incurred.
- Straight line basis is a method of calculating depreciation and amortization.
- The IRS uses the General Depreciation System (GDS) method to calculate straight line depreciation for real estate assets.
- While the purchase price of an asset is known, one must make assumptions regarding the salvage value and useful life.
- Depreciation expense represents the reduction in value of an asset over its useful life.
These numbers can be arrived at in several ways, but getting them wrong could be costly. Also, a straight line basis assumes that an asset’s value declines at a steady and unchanging rate. This may not be true for all assets, in which case a different method should be used. However, the simplicity of straight line basis is also one of its biggest drawbacks. One of the most obvious pitfalls of using this method is that the useful life calculation is based on guesswork. For example, there is always a risk that technological advancements could potentially render the asset obsolete earlier than expected.
Straight-Line Depreciation FAQs
Straight line depreciation is the most commonly used and straightforward depreciation method for allocating the cost of a capital asset. It is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset. An accountant uses depreciation is to allocate the cost of a fixed asset over the years of its useful life.
- One convention that companies embrace is referred to as depreciation and amortization.
- The “2” in the formula represents the acceleration of deprecation to twice the straight-line depreciation amount.
- She is a licensed CPA in Minnesota and is a member of the State Board of Accountancy.
- It would be inaccurate to assume a computer would incur the same depreciation expense over its entire useful life.
- The annual depreciation expense is divided by the difference between the cost of the asset and its salvage value to calculate this rate.
It would be inaccurate to assume a computer would incur the same depreciation expense over its entire useful life. The cost of an asset is the amount that was paid to purchase it, while the salvage value is the estimated value of the asset at the end of its useful life. The useful life of an asset refers to the total amount of time that it can be used before being replaced or retired.
Advantages and Disadvantages of Straight Line Basis
This method is commonly used by companies with assets that lose their value or become obsolete more quickly. 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. Accumulated depreciation is eliminated from the accounting records when a fixed asset is disposed of. To calculate the straight-line depreciation expense of this fixed asset, the company takes the purchase price of $100,000 minus the $30,000 salvage value to calculate a depreciable base of $70,000.
The annual depreciation expense would be calculated by dividing the depreciable basis ($20,000 – $10,000) by the useful life (10 years), resulting in an annual depreciation expense of $2,000. The straight line depreciation rate would be calculated by dividing the annual depreciation expense ($2,000) by the cost of the asset ($20,000), resulting in a rate of 0.1 or 10%. 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. The formula for calculating depreciation is the value of asset less salvage value divided by the life of the asset. The profit or loss on sale can be recorded separately in the case of the straight-line depreciation method. But at the same time, this method is not efficient for organizations that have a large number of assets.
