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#1 2021-12-01 04:14:28

Hannibal lecter
Registered: 2016-02-11
Posts: 330

what is Straight-line depreciation?

what is Straight-line depreciation?
just a concept not a graph I read books and I pass through this term
I read about money being dropped or value is reduced???!
what is this is there a very simple example to explain that for me please

Wisdom is a tree which grows in the heart and fruits on the tongue


#2 2021-12-01 13:58:09

Registered: 2005-06-28
Posts: 35,588

Re: what is Straight-line depreciation?

Hi Hannibal lecter,

Straight-line depreciation:

What Is Straight Line Depreciation?

Straight line depreciation is a common method of depreciation where the value of a fixed asset is reduced over its useful life.

It's used to reduce the carrying amount of a fixed asset over its useful life. With straight line depreciation, an asset's cost is depreciated the same amount for each accounting period. You can then depreciate key assets on your tax income statement or business balance sheet.

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. Straight line depreciation is the easiest depreciation method to calculate. It also results in the fewest calculation errors. Thus, this calculation method is recommended.

How Do You Calculate Straight Line Depreciation?

Why use the straight-line method of depreciation? It represents the depreciation expense evenly over the estimated full life of a fixed asset. You can use a basic straight-line depreciation formula to calculate this, too.

Let's break down how you can calculate straight-line depreciation step-by-step. We’ll use an office copier as an example asset for calculating the straight-line depreciation rate.

Step 1: Calculate the total cost of the asset

First and foremost, you need to calculate the cost of the depreciable asset you are calculating straight-line depreciation for. After all, the purchase price or initial cost of the asset will determine how much is depreciated each year.

Let’s say that an office worker purchases a copier for $8000. However, it costs another $100 to ship the copier to the office. It also costs $500 in taxes. The copier costs, in total, $8600.

$8000 + $100 + $500 = $8600

When you calculate the cost of an asset to depreciate, be sure to include any related costs. This can include material costs, labor, taxes, and more.

Step 2: Find and subtract any salvage value from the asset's cost

With straight-line depreciation, you must assign a “salvage value” to the asset you are depreciating. The salvage value is how much you expect an asset to be worth after its “useful life”.

In the above example, say that the office worker expects the copier to be worth $2000 at the end of its useful life. The following calculation would look like this:

$8600 – $2000 = $6600

The salvage value of an asset is somewhat inexact. Try to use common sense when determining the salvage value of an asset, and always be conservative. Don't overestimate the salvage value of an asset since it will reduce the depreciation expense you can take.

Step 3: Calculate the asset’s useful life

You’ll next need to calculate the useful life of an asset if you want to depreciate it. Common assets and useful lives include:

Office machines like copiers and fax machines – 5 years
Fixtures and office furniture – 7 years
Vehicles like cars and trucks – 5 years
Livestock, manufacturing tools, and tractors – 3 years

Step 4: Determine the annual rate of depreciation

You can determine the annual depreciation rate of an asset with the following formula:

1 / Years of useful life
If the above copier has a useful life of five years, the equation looks like this:

1 / 5 = 0.20
In other words, the copier can be depreciated by 20% each year. Note that the straight depreciation calculations should always start with 1.

Step 5: Multiply your depreciation rate by the asset’s depreciable cost

The next step in the calculation is simple, but you have to subtract the salvage value. In our example, the copier cost $8600 at first. It had a salvage value of $2000. The annual depreciation rate is 20%.

The resulting calculation is:

20% x ($8600 – $2000) = $1320
With this cancellation, the copier’s annual depreciation expense would be $1320.

Step 6: Calculate monthly depreciation

Last but not least, you can calculate the monthly depreciation expense by taking the above number and dividing it by 12. You don't have to stick with annual straight-line depreciation! For our example copier, the equation looks like this:

$1320 / 12 = $110
In total, the copier’s monthly depreciation expense is $110.

What Is Straight Line Depreciation in Accounting?

Straight-line depreciation can be recorded as a debit to the depreciation expense account. It can also be a credit to your accumulated depreciation account. Accumulated depreciation is a contra asset account, so it is paired with and reduces the fixed asset account.

Key Takeaways

The straight-line depreciation method makes it easy for you to calculate the expense of any fixed asset in your business. With straight-line depreciation, you can reduce the value of a tangible asset. Then you can benefit from that depreciation during tax season.

It appears to me that if one wants to make progress in mathematics, one should study the masters and not the pupils. - Niels Henrik Abel.

Nothing is better than reading and gaining more and more knowledge - Stephen William Hawking.


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