How to Use Straight-Line Depreciation
The straight-line method of depreciation is commonly used to calculate depreciation costs for financial statement purposes under generally accepted accounting principles (GAAP) in the United States. Depreciation is an accounting concept that measures the reduction in the value of fixed assets, such as buildings, equipment, land improvements and vehicles. While not appropriate for all assets, and often not for tax reporting under the U.S. Internal Revenue Code, straight-line depreciation remains the simplest depreciation method and, in many cases, provides the most accurate representation of a business's depreciation costs.
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Things You'll Need
- Cost of the asset
- Estimated useful life of the asset (measured in years)
- Residual value of the asset at disposal
Instructions
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1
Determine the cost of the asset for depreciation purposes. Typically, the cost of the asset to be depreciated is simply the cash paid for the asset. However, when additional costs are necessary to acquire, transport or prepare the asset for service, these costs should be added to the cost of the asset to determine the asset's cost for depreciation purposes.
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2
Subtract from the cost of the asset for depreciation purposes the estimated value of the asset at disposal. Often this is referred to as the salvage value of the asset and is the value you anticipate receiving for the asset minus disposal costs. This is the depreciable value of the asset.
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Divide the depreciable value of the asset by the estimated useful life of the asset. This is the annual value of depreciation expense related to the asset.
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Record depreciation expenses in the financial statements by crediting the accumulated depreciation account for the annual value of depreciation expense and debiting the depreciation expense account.
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Tips & Warnings
The same methodology used to calculate straight-line depreciation may be used to amortize most intangible assets.
In many cases, the salvage value of an asset is zero.
Straight-line depreciation is not appropriate for all types of assets and is not always acceptable for income tax purposes.
Many, but not all, straight-line depreciation systems will adjust first-year depreciation for the period of the year the asset was used or in service. For example, if an asset was placed in service halfway through the year, only one-half of the annual depreciation expense will be claimed in the first year.
