Straight Line Depreciation
What Is Straight Line Depreciation?
Straight line depreciation, also known as straight line basis, is the simplest method of calculating depreciation under generally accepted accounting principles (GAAP).
In general, businesses depreciate their capital assets over the life of the asset. The Internal Revenue Service (IRS) requires businesses to use one of several approved methods when calculating depreciation expense on tax filings.
The straight line method is the most commonly used depreciation method because it is easy to calculate and provides a reasonable allocation of an asset’s cost over its useful life.
How To Calculate Straight Line Depreciation
The basic straight line equation is:
Straight Line Depreciation = (Asset Cost – Salvage Value) / Useful Life of Asset = Depreciation Expense per Year
For example, assume a company buys a $1,000 computer with a salvage value of $100 and a four-year useful life.
The company’s depreciation expense for the first year would be $225 (($1,000 – $100) / 4).
In each subsequent year, the company would depreciate the asset by $225 until the fourth year, when the salvage value is reached.
At that point, the company would have recorded $900 in depreciation expense ($225 x 4).
STRAIGHT LINE Method of Depreciation in 3 Steps
Why Use Straight Line Depreciation?
There are several reasons businesses choose to use straight line depreciation:
- It is easy to calculate.
- It provides a consistent amount of depreciation expense each year.
- It matches revenue with expenses in the same period, which is important for tax purposes.
Businesses may opt for different methods of depreciation if the asset is expected to generate more revenue in its early years or if it will be used more heavily in its early years.
FAQs – Straight Line Depreciation
What are assumptions in the straight-line method of depreciation?
The straight-line method of depreciation assumes that an asset will be used evenly over its useful life.
This assumption doesn’t always hold true, but it is the simplest method to calculate depreciation expense.
How do I know if my business should use the straight-line method of depreciation?
The straight-line method of depreciation is the most commonly used method because it is easy to calculate and provides a reasonable allocation of an asset’s cost over its useful life.
If your business needs to depreciate an asset for tax purposes, the IRS requires businesses to use one of several approved methods, and the straight line method is one of those methods.
What are some other methods of calculating depreciation?
There are several other methods of calculating depreciation, including the declining balance method and the sum-of-the-years’-digits method.
The method you choose should align with how your business expects to use the asset over its useful life.
How do I account for changes in an asset’s salvage value or useful life?
The IRS requires businesses to recalculate depreciation expense if there are significant changes in an asset’s salvage value or useful life.
For example, if an asset’s salvage value decreases by more than 10%, businesses must adjust their depreciation expense accordingly.
Why is depreciation considered a non-cash expense?
Depreciation is considered a non-cash expense because it is an allocation of an asset’s cost over its useful life, rather than a direct payment for the asset.
Depreciation expense is recorded on the income statement, but it does not require a business to make a direct cash outlay.
Summary – Straight Line Depreciation
The straight line depreciation method is the simplest way to calculate depreciation expense.
Under this method, businesses depreciate an asset by a consistent amount each year over the asset’s useful life.
The straight line method is easy to calculate and provides a reasonable allocation of an asset’s cost over its useful life, which makes it the most commonly used depreciation method.
Businesses may choose to use a different depreciation method if the asset is expected to generate more revenue in its early years or if it will be used more heavily in its early years. However, if businesses do choose to use a different depreciation method, they must still follow IRS guidelines.