Straight-Line Depreciation

What is straight-line depreciation?

Depreciation allows businesses to record the cost of a fixed asset—such as a building or equipment—as an incremental expense, even if they purchased it in full. In turn, they can match the asset's cost to the revenue it generates each year, creating a clearer picture of a company’s financial performance over time. Straight-line depreciation is one method of calculating an asset's incremental expense.

The straight-line depreciation method evenly distributes the cost of the asset by deducting the same amount every year. This method assumes the fixed asset will decrease in value at a steady rate, which differs from an accelerated depreciation method where the asset loses value more quickly in the early years of its life.

There are three factors you need to calculate straight-line depreciation:

• Cost basis is the price you paid for the asset, including costs like sales tax, shipping, and installation.
• Salvage value is the estimated worth of the asset once its useful life ends. In other words, how much a company can sell it for when it's no longer useful.
• Useful life is the estimated period of time that an asset will generate profit.

Calculating depreciation involves deducting the salvage value from the cost basis and then dividing the result by the asset's useful life. For example, if your computer cost $2,000 with a useful life of five years, and you estimate its salvage value at $200, its annual depreciation expense is $360.

Typically a business' bookkeeping team will record the fixed expense as a debit in its depreciation expense account and then add up each year's recorded expense and list it as a credit in the accumulated depreciation account. For tax purposes, the expense is an annual income tax deduction.

Straight-line depreciation FAQs 

What is the straight-line depreciation formula?

Use this formula to calculate straight-line depreciation:

Straight-line depreciation = (cost basis - salvage value) / useful life

How do you determine the useful life of an asset?

The Internal Revenue Service (IRS) offers a helpful guide (Pub. 946) to calculating the useful life of commonly depreciated items. Below are a few examples of their property classifications categorized by year.

• 3-year property: Tractor, horses over a certain age, qualified rent-to-own property
• 5-year property: Automobiles, trucks, qualified technical equipment, office machinery, etc.
• 7-year property: Office furniture, certain agricultural equipment, fences used for farming, etc.
• 10-year property: Water transportation equipment, single-purpose agricultural or horticultural structure, fruit or nut trees/vines, etc.

How do you determine the salvage value of an asset?

There isn't a set way to calculate an asset's salvage value. Essentially, you want to estimate the value it will have at the end of its useful life. One tactic is to subtract the accumulated depreciation from the asset's original cost, another is to look at the market data of similar assets. 

When should straight-line depreciation be used?

There are several instances where you might choose to use the SLM of depreciation. For example, if the asset you're depreciating will have consistent wear and tear over time or if you want to make income tax planning more predictable through fixed annual deductions.