The straight-line depreciation method is a common way of allocating “wear and tear” to the cost of an item over its lifespan. This method assumes that an asset declines in value by the same amount each year, or that it has no salvage value. The depreciation of an asset under the straight-line depreciation method is constant per year.
How Does It Work?
Why Would You Choose This Method?
When Should You Use This Method?
Why Would You Not Choose This Method?
Other Types of Depreciation Methods
Declining Balance Method
Sum-of-the-Years’ Digits Method
ACRS (Modified Accelerated Cost Recovery System)
The ACRS provides a faster depreciation schedule for large capital expenditures, but it has been repealed and replaced by MACRS.
MACRS (Modified Accelerated Cost Recovery System)
150% Declining Balance Method
Depreciation methods come in many forms and should be utilized according to the information you have about your asset and how it will be used.
The straight-line depreciation method is a common way of allocating “wear and tear” to the cost of an item over its lifespan.
This method assumes that an asset declines in value by the same amount each year, or that it has no salvage value.
The depreciation of an asset under the straight-line depreciation method is constant per year.
Straight-Line Method of Depreciation FAQs
To calculate straight-line depreciation, you need to know three pieces of information about your asset: purchase price or cost, salvage value at the end of its useful life, and estimated number of years that the asset will be in service. Then you can use this formula to calculate straight-line depreciation: Depreciation = ( 1/ Estimated Useful Life) * Purchase Price or Cost
The straight-line method of depreciation can be used to depreciate almost any type of tangible assets such as property, furniture, computers, and equipment.
The most important difference between this formula and other common depreciation formulas is the denominator. Other methods have a denominator of 1 or 1/2 depending on whether an asset was acquired during its first year or after it had been in use for 1 year. The denominator in straight-line depreciation is 1/ Estimated Useful Life, which has the effect of making 1/ Estimated Useful Life much larger than 1 or 1/2 when an asset is new.
The straight-line depreciation method is simple to use and easy to compute. If you don't expect your asset's expenses to change greatly over its useful life, it may be the best choice for calculating depreciation.
You would likely choose the straight-line depreciation method when your asset has a constant or steady rate of consumption when your business does not expect its expenses for using the asset to change greatly over time, and if the useful life is expected to last longer than 1 year.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.