How to Do Straight-line Depreciation on PP&E
Property, plant and equipment must depreciate over time. An asset depreciates as it loses value from use. In accounting terms, this depreciation then moves the decline in value due to use to the income statement as an expense from the original property, plant and equipment on the balance sheet. The straight-line depreciation method is the simplest method to calculate. Straight-line depreciation will take a constant depreciation rate over the life of the property, plant and equipment.
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Instructions
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Write down the asset's cost, residual value and useful life. The cost is how much the company paid for the asset. The residual value is how much the company estimates the asset will be worth at the end of the asset's useful life. The useful life is a company estimate on how long the asset will last before it no longer is useful. For example, a company buys a car for $30,000. The company estimates its residual value is $2,000 and its useful life is seven years.
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Subtract the residual value from cost of the asset. This is the depreciable base. In the example, $30,000 minus $2,000 equals $28,000.
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Divide the depreciable base by the asset's useful life. This is the yearly depreciation. In the example, $28,000 divided by seven years equals $4,000 of depreciation each year.
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References
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