Depreciation Expense & Straight-Line Method w Example & Journal Entries

The expense is an income statement line item recognized throughout the life of the asset as a “non-cash” expense. The sum-of-the-years’ digits method is calculated by multiplying a fraction by the asset’s depreciable base– the original cost minus salvage value– in each year. The fraction uses the sum of all years in the useful life as the denominator. A prevalent misconception is that straight-line depreciation suggests an asset is equally productive throughout its life. However, it’s primarily a cost allocation method, not measuring an asset’s operational efficiency or productivity.

What Is Straight Line Amortization?

To get a better understanding of how to calculate straight-line depreciation, let’s look at an example. Additionally, the IRS allows businesses to write off certain expenses using this method under the Modified Accelerated Cost Recovery System (MACRS). The straight-line method is a popular choice for its simplicity, but it has limitations. Understanding the pros and cons can help you decide if this depreciation method is right for your business.

While these depreciation expenses do reduce your net income, it’s important to note that they don’t impact cash flow or earnings before interest, taxes, depreciation, and amortization (EBITDA). The value we get after following the above straight-line method of depreciation steps is the depreciation expense, which is deducted from the income statement every year until the asset’s useful life. Thus, the depreciation expense in the income statement remains the same for a particular asset over the period. As such, the income statement is expensed evenly, and so is the asset’s value on the balance sheet. Unlike more complex methodologies, such as double declining balance, this method uses only three variables to calculate the amount of depreciation each accounting period. Companies use depreciation for physical assets, and amortization for intangible assets such as patents and software.

What Is Straight Line Depreciation Method?

Assets like computers and vehicles can be essential to achieving high business performance, but how do you anticipate and calculate when these investments begin to lose their value? Owning a company means investing time and money into assets that help your business run smoothly. With nearly 37% of business owners starting with less than $1,000, according to the QuickBooks Entrepreneurship in 2025 survey, it’s essential to track how those early investments lose value over time. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided. Straight-line depreciation is popular with some accountants, but unpopular with others and with some businesses because extra calculations may be required for some industries.

The total accumulated depreciation at the end of the asset’s useful life will be the same as an asset depreciated under the straight line method. However, an asset depreciated using the double declining balance method will have depreciation expense taken over a smaller number of years than one depreciated using straight line depreciation. Straight-line depreciation is a method for calculating depreciation expense, where the value of a fixed asset is reduced evenly over its useful life. This method assumes that the asset will lose value at a consistent rate, making it a straightforward and predictable way to depreciate assets.

Units of Output Method

Depreciation generally applies to an entity’s owned fixed assets or to its leased right-of-use assets arising from lessee finance leases. Explore different depreciation methods, seek advice from financial professionals, and consider financial accounting software for improved accuracy. This ensures clearer and more accurate financial reports, setting your business up for long-term success. The straight-line method doesn’t account for this accelerated depreciation, resulting in a depreciation expense that doesn’t match the actual decline in value over time.

Step 5: Divide by 12 for monthly depreciation (optional)

This method is particularly suitable for assets that experience consistent wear and tear over time, benefiting from evenly spread-out expense recognition. As you record depreciation in your trial balance, it affects the income statement and balance sheet. Each year, you’ll reduce the value of the asset on the balance sheet while also recording the depreciation charge on the income statement. The straight-line method of depreciation spreads the cost of a fixed asset evenly across its useful life, reflecting how the asset’s economic value diminishes over time. Hence, how to calculate straight line depreciation method the Company will depreciate the machine by $1000 annually for eight years. Many accountants use a simple, easy-to-use method called the straight-line basis.

The units of production method is based on an asset’s usage, activity, or units of goods produced. Therefore, depreciation would be higher in periods of high usage and lower in periods of low usage. This method can be used to depreciate assets where variation in usage is an important factor, such as cars based on miles driven or photocopiers on copies made. Not all assets are purchase at the beginning of the year, some of them may be purchased in the middle of the year. So it will not depreciate for the whole first year,  we only depreciate base on the number of months within the year. If assets only use for 3 months of the year, they will depreciate for 1/4 or 25% (3 months / 12 months) of the first-year depreciation expense.

The method can help you predict your expenses and determine when it’s time for a new investment and prepare for tax season. Learn how to calculate straight-line depreciation, when to use it, and what it looks like in the real world. Below is a break down of subject weightings in the FMVA® financial analyst program.

• Now that you know the difference between the depreciation models, let’s see the straight-line depreciation method being used in real-world situations.
• In addition to straight line depreciation, there are also other methods of calculating depreciation of an asset.
• In accounting, there are many different conventions that are designed to match sales and expenses to the period in which they are incurred.
• Regardless of the depreciation method used, the total depreciation expense (and accumulated depreciation) recognized over the life of any asset will be equal.
• Understanding how much value an asset loses over time allows you to plan for replacements and manage expenses.
• For example, there is always a risk that technological advancements could potentially render the asset obsolete earlier than expected.

Declining balance method

Straight-line depreciation, on the other hand, spreads the loss of value evenly across the asset’s useful life, providing consistent expense amounts year over year. It assumes an asset will lose the same amount of value each year and works well for assets that lose value steadily over time. Accelerated depreciation recognizes a higher loss of value in the earlier years of an asset’s lifespan, reflecting faster wear-and-tear or obsolescence upfront. This approach can be beneficial for businesses looking to maximize deductions sooner.

As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. One of the central aspects of straight-line depreciation is the concept of “useful life.” To depreciate your assets with this method, you need a good estimate of the useful life of the asset. While it’s possible to use different methods of depreciation for different assets, you must apply the same method for the life of an asset. In straight-line depreciation, the assets are depreciated at an equal value every year of their expected life.

This method is calculated by adding up the years in the useful life and using that sum to calculate a percentage of the remaining life of the asset. The percentage is then applied to the cost less salvage value, or depreciable base, to calculate depreciation expense for the period. Here is how to calculate the annual depreciation expense using double declining balance. An accelerated depreciation method takes the bulk of the depreciation expense in the first few years and a lower rate of depreciation in the final few years of the asset’s useful life.

• Straight line depreciation loses some of its appeal when it is applied to high dollar value assets that may depreciate at an uneven rate.
• It’s especially useful for budgeting the cost and value of assets like vehicles and machinery.
• From the amortization table above, we will deduct $30,000 from the current net asset value of $65,000 at the end of year 5 resulting in a $35,000 depreciable cost.
• The method is alternatively referred to as the equal installment method, fixed installment method or original cost method of depreciation.
• Straight line depreciation is the most commonly used and straightforward depreciation method for allocating the cost of a capital asset.
• The straight-line method operates under the assumption that the usefulness of an asset — and thus its value — declines evenly over time.

An asset’s salvage value is the amount that remains on a company’s books after the asset is fully depreciated. A fixed asset may have a salvage value because the company plans to resell the asset when it is done with it. Depreciation is a non-cash expense, meaning it doesn’t involve an actual outflow of cash. Both the cash flow statement and EBITDA focus on cash transactions, so they aren’t affected by most non-cash expenses like depreciation. Think of the straight-line method of depreciation as a powerful, systematic way to spread out the cost of an asset across its life. While the purchase price of an asset is known, one must make assumptions regarding the salvage value and useful life.

Declining Balance Depreciation Method

An asset’s useful life is the length of time over which a company expects the asset to continue to remain useful– to provide a benefit to the business. It is the length of time over which an asset is depreciated because the expense from the asset must tie to the revenue generated by the asset in the same period per the matching principle. To calculate the straight line basis, take the purchase price of an asset and then subtract the salvage value, its estimated value when it is no longer expected to be needed. Then divide the resulting figure by the total number of years the asset is expected to be useful. In finance, a straight-line basis is a method for calculating depreciation and amortization.

Yes, financial solutions like Intuit Enterprise Suite can automate depreciation calculations, saving you time and reducing the risk of errors. This approach calculates depreciation as a percentage and then depreciates the asset at twice the percentage rate. Develop a depreciation schedule to visualize how assets lose value over time. This can help with budgeting, financial forecasting, and planning for replacements.

The straight line depreciation method is used to calculate the annual depreciation expense of a fixed asset. Depreciation is the process of allocating the cost of an asset over its useful life. It is the technique a company uses to track the decreasing value of aging assets. The assets provide benefit to the company over the useful life, so sl depreciation method the expenses also require to allocate base on these time frames too. The company uses depreciation for physical fixed assets and amortization for intangible assets.

It helps determine the total amount that will be depreciated over the asset’s life, impacting both the annual depreciation expense and the asset’s net book value. Depreciation expense represents the reduction in value of an asset over its useful life. Multiple methods of accounting for depreciation exist, but the straight-line method is the most commonly used. This article covered the different methods used to calculate depreciation expense, including a detailed example of how to account for a fixed asset with straight-line depreciation expense. Unlike the other methods, the units of production depreciation method does not depreciate the asset based on time passed, but on the units the asset produced throughout the period. This method is most commonly used for assets in which actual usage, not the passage of time, leads to the depreciation of the asset.