Straight Line Depreciation Method Example of Straight Line Depreciation

Your business should determine how you’ll pay for capital expenditures. As explained above, the cost of an asset minus its accumulated depreciation is its book value. Then, you would report the depreciation expense on your company’s annual income statement for five years. The straight-line depreciation method spreads the cost evenly over the life of an asset. Because this method is the most universally used, we will present a full example of how to account for straight-line depreciation expense on a finance lease later in our article. If you’re unsure or unable to arrive at an estimated useful life for a newly acquired asset, one option is to use the lives given in IRS Publication 946. While these lives are required to be used for income tax purposes, they aren’t required for bookkeeping.

The IRS began to use what’s called the Accelerated Cost System of depreciation in 1986. Under MACRS, you have the option of two different systems of determining the “life” of your asset, the GDS and the ADS . These two systems offer different methods and recovery periods for arriving at depreciation deductions. There are good reasons for using both of these methods, and the right one depends on the asset type in question. The straight-line depreciation method is the easiest to use, so it makes for simplified accounting calculations. We can also calculate the depreciation rate, given the annual depreciation amount and the total depreciation amount, which is the annual depreciation amount/total depreciation amount. Salvage Value Of The AssetSalvage value or scrap value is the estimated value of an asset after its useful life is over.

Example: Straight-line depreciation with a finance lease

Because it is the simplest GAAP-compliant method, it is also the most commonly used in practice. Depreciation is important because, by matching expenses with revenue, a company’s overall profitability is determined more accurately. The straight-line method of depreciation, specifically, results in even, stable depreciation charges, so it makes budgeting and financial forecasting easier. Additionally, the consistent charges assist operating profitability and cash flow analysis, since they are easily identified and removed. 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 everyaccounting period.

The total cost of the furniture and fixtures, including tax and delivery, was $9,000. Sally estimates the furniture straight line formula accounting will be worth around $1,500 at the end of its useful life, which, according to the chart above, is seven years.

Straight Line Depreciation Definition

This may not be true for all assets, in which case a different method should be used. https://simple-accounting.org/ Straight line basis is a method of calculating depreciation and amortization.

• There are a couple of accounting approaches for calculating depreciation, but the most common one is straight-line depreciation.
• However, when using the double-declining balance method of depreciation, an entity is not required to only accelerate depreciation by two.
• This lease qualifies as a finance lease because it is written in the agreement that ownership of the equipment automatically transfers to Reed, Inc. when the lease terminates.
• The useful life of the asset—how many years you think it will last.
• In the last line of the chart, notice that 25% of $3,797 is $949, not the $797 that’s listed.

The expense is an income statement line item recognized throughout the life of the asset as a “non-cash” expense. Because Sara’s copier’s useful life is five years, she would divide 1 into 5 in order to determine its annual depreciation rate. Straight line depreciation is the easiest depreciation method to calculate.