Straight Line Depreciation

straight line method accounting

Please complete this reCAPTCHA to demonstrate that it’s you making the requests and not a robot. If you are having trouble seeing or completing this challenge, this page may help. If you continue to experience issues, you can contact JSTOR support. Accumulated depreciation on 30 June 2020 will therefore be $2000 x 2.5 which is equal to $5000. Stay updated on the latest products and services anytime, anywhere. FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts.

At commencement, the lessee records a lease asset and lease liability of $843,533. Below we will describe each method and provide the formula used to calculate the periodic depreciation expense. Divide the estimated useful life into 1 to arrive at the straight-line depreciation rate.

Our Top Accounting Software Partners

Under this method, the difference between the original cost of an asset and its estimated scrap value is calculated and then divided by the number of years in its estimated life. This method equally the cost of an asset in income statement over its useful life. It also expenses the same amount of money for each accounting period, making it easy to keep track of and incorporate into accounting records. Straight-line depreciation is considered one of the many conventions used by accountants to match expenses and sales during a set period of time in which they were incurred. Straight-line depreciation is the most common method of allocating the cost of a plant asset to expense in the accounting periods during which the asset is used. With the straight-line method of depreciation, each full accounting year will report the same amount of depreciation. The total amount of depreciation over the years of the asset’s useful life will be the asset’s cost minus any expected or assumed salvage value.

Over time, this value will decrease as the asset’s value decreases. This method can be used to calculate the depreciation of both physical and intangible assets. In double-declining balance, more of an asset’s cost is depreciated in the early years of the asset’s life. If an asset has a 5-year expected lifespan, two-fifths of its depreciable cost is deducted in the first year, versus one-fifth with Straight-line. But unlike Straight-line depreciation, the depreciable cost of the asset is lowered each year by subtracting the previous year’s depreciation. When you purchase the asset, you’ll post that transaction to your asset account and your cash account, creating a contra account in order to keep track of your accumulated depreciation.

This accounting tutorial teaches the Straight-line method of depreciation. We define the method, show how to depreciate an asset using the Straight-line method, and show the accounting transactions involved. 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.

straight line method accounting

That’s why our editorial opinions and reviews are ours alone and aren’t inspired, endorsed, or sponsored by an advertiser. Editorial content from The Blueprint is separate from The Motley Fool editorial content and is created by a different analyst team. Sage 50cloud is a feature-rich accounting platform with tools for sales tracking, reporting, invoicing and payment processing and vendor, customer and employee management.

Financial Accounting

For the decrease in value of a currency, see Currency depreciation. GAAP is a collection of accounting standards that set rules for how financial statements are prepared. It’s based on long-standing conventions, objectives and concepts addressing recognition, presentation, disclosure, and measurement of information. $150 is the expected annual straight-line depreciation expense of the new printer. Two less-commonly used methods of depreciation are Units-of-Production and Sum-of-the-years’ digits.

straight line method accounting

We discuss these briefly in the last section of our Beginners Guide to Depreciation. After an asset has been fully depreciated, it can remain in use as long as it is needed and is in good working order.

Quick Review Of Assets And Expenses

Product Reviews Unbiased, expert reviews on the best software and banking products for your business. Case Studies & Interviews Learn how real businesses are staying relevant and profitable in a world that faces new challenges every day. Beginner’s Guides Our comprehensive guides serve as an introduction to basic concepts that you can incorporate into your larger business strategy. Alternatives Looking for a different set of features or lower price point?

  • The salvage value is the amount the asset is worth at the end of its useful life.
  • Depreciation is equal for all the years, in end life of asset, it can bear more expense which puts more pressure.
  • Canada’s Capital Cost Allowance are fixed percentages of assets within a class or type of asset.
  • Accelerated depreciation will help the airline take a higher reduction immediately hence reducing its current tax bill.
  • Under this method, the difference between the original cost of an asset and its estimated scrap value is calculated and then divided by the number of years in its estimated life.
  • Straight line basis is the simplest technique used to compute the value loss of an asset over its useful life.

It is employed when there is no particular pattern to the manner in which an asset is to be utilized over time. Use of the straight-line method is highly recommended, since it is the easiest depreciation method to calculate, and so results in few calculation errors. The Excel equivalent function for Straight-Line Method is SLN will calculate the depreciation expense for any period. For a more accelerated depreciation method see, for example, our Double Declining Balance Method Depreciation Calculator. Straight-line depreciation can be recorded as a debit to the depreciation expense account.


The next step in the calculation is simple, but you have to subtract the salvage value. It represents the depreciation expense evenly over the estimated full life of a fixed asset.

  • Whether you’re creating a balance sheet to see how your business stands or an income statement to see whether it’s turning a profit, you need to calculate depreciation.
  • Examples of expenses would be items such as office supplies and monthly costs like rent and utilities.
  • Because Sara’s copier’s useful life is five years, she would divide 1 into 5 in order to determine its annual depreciation rate.
  • They are able to choose an acceleration factor appropriate for their specific situation.
  • As already mentioned, calculating an asset’s depreciation using the straight line depreciation method is simple.
  • Using the straight line basis method, the depreciation for the machinery will be $1,000 (($10,500 – $500) / 10).

This type of depreciation method is easy to use and is highly recommended for companies which to calculate depreciation in a simple and effective manner. In this article, we explain what straight-line depreciation means, when it is used, how to calculate straight-line depreciation and examples of using this depreciation method in business. Even if you’re still struggling with understanding some accounting terms, fortunately, straight line depreciation is pretty straightforward. If you’re looking for accounting software to help you keep better track of your depreciation expenses, be sure to check out The Blueprint’s accounting software reviews. The declining balance method calculates more depreciation expense initially, and uses a percentage of the asset’s current book value, as opposed to its initial cost.

Need Business Insurance?

The method was developed to give a picture of the consumption pattern of the asset involved. It is generally used when there is no pattern on how you use an asset over time.

This type of calculation is often the default depreciation method used to determine the carrying monetary value of an asset over its lifetime. Straight-line depreciation is most often used when there is no set pattern as to how the asset will be used over time. This method is considered one of the easiest depreciation methods and provides a highly accurate depreciation calculation with few calculation errors.

  • Therefore, the fittest depreciation method to apply for this kind of asset is the straight-line method.
  • In addition, additional first year depreciation of 50% of the cost of most other depreciable tangible personal property is allowed as a deduction.
  • When you purchase the asset, you’ll post that transaction to your asset account and your cash account, creating a contra account in order to keep track of your accumulated depreciation.
  • 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.
  • Because of this, the straight line depreciation method isn’t the best for this type of asset.
  • The business plans to use the straight line depreciation method to account for the asset’s depreciation.

This will be the cost of the asset that the business will record in its books. What it does is that it evenly allocates the cost of the asset over its useful life. 10 × actual production will give the depreciation cost of the current year.

How To Calculate Depreciation Expense

Looking for the best tips, tricks, and guides to help you accelerate your business? Use our research library below to get actionable, first-hand advice. Best Of We’ve tested, evaluated and curated the best software solutions for your specific straight line method accounting business needs. Accounting Accounting software helps manage payable and receivable accounts, general ledgers, payroll and other accounting activities. Salvage value of the asset – eventual cost of the asset at the end of its life.

A strong form finance lease is one that has a transfer of ownership, a bargain purchase option , or a purchase option the lessee is reasonably certain to exercise. With a strong form lease, the asset is depreciated over the useful life of the asset as it is assumed the lessee will own the asset at the end of the lease term. For weak form finance leases where the lessor retains ownership of the asset at the end of the lease term, the asset is depreciated over the shorter of the useful life or the lease term. With this cancellation, the copier’s annual depreciation expense would be $1320. This method was created to reflect the consumption pattern of the underlying asset. It is used when there’s no pattern to how you use the asset over time.

That deferred tax asset will be reduced over time until the reported income under GAAP and the reported income to the IRS align at the end of the straight line depreciation schedule. Straight line depreciation method or original cost method is the simplest and most commonly used depreciation method.

The group depreciation method is used for depreciating multiple-asset accounts using a similar depreciation method. The assets must be similar in nature and have approximately the same useful lives. If the vehicle were to be sold and the sales price exceeded the depreciated value then the excess would be considered a gain and subject to depreciation recapture. In addition, this gain above the depreciated value would be recognized as ordinary income by the tax office. If the sales price is ever less than the book value, the resulting capital loss is tax-deductible. If the sale price were ever more than the original book value, then the gain above the original book value is recognized as a capital gain.

Leave a Reply