Calculating Straight-Line Depreciation

Estimate the asset’s salvage value, or how much it can be sold for at the end of the useful life. Some assets experience accelerated obsolescence in their early years, https://accounting-services.net/ such as computers and vehicles. It requires the use of MACRS recovery periods to be acceptable for U.S. tax purposes, prompting the need for additional calculations.

Accumulated depreciation is a contra asset account, which means that it is paired with and reduces the fixed asset account. Accumulated depreciation is eliminated from the accounting records when a fixed asset is disposed of. To calculate straight line basis, take the purchase price of an asset and then subtract the salvage value, its estimated sell-on value when it is no longer expected to be needed.

Other Depreciation Methods

In our earlier example, you would calculate Year 1’s deduction by taking 5 divided by 5+4+3+2+1 multiplied by $15,000. You’d calculate Year 2’s deduction by taking 4 divided by (5+4+3+2) 5+4+3+2+1. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein. According to straight-line depreciation, your MacBook will depreciate $300 every year.

• You don’t have to only use straight-line deprecation on an annual basis.
• When you’re interviewing for accounting roles, employers will expect you to understand common business terms and formulas like straight line depreciation.
• Some assets wear out over the years and begin losing their value; for example, computers, tools, equipment, vehicles and buildings can depreciate over time and must be repaired or replaced.
• Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business.
• It is most useful when an asset’s value decreases steadily over time at around the same rate.

It’s used to reduce the carrying amount of a fixed asset over its useful life. With straight line depreciation, an asset’s cost is depreciated the same amount for each accounting period.

Method to Get Straight Line Depreciation (Formula)

Use the standard straight-line depreciation formula, below, to calculate annual depreciation expense. the formula to compute annual straight-line depreciation is: On August 4, Armstrong Trucking, Inc., paid $4,500 to replace the engine in one of its trucks.

Multiple methods of accounting for depreciation expense exist, but the straight-line method is the most commonly used. In this article, we covered the different methods used to calculate depreciation expense, and went through a specific example of a finance lease with straight-line depreciation expense. In our explanation of how to calculate straight-line depreciation expense above, we said the calculation was (cost – salvage value) / useful life. Depreciation is a way to account for the reduction of an asset’s value as a result of using the asset over time. Depreciation generally applies to an entity’s owned fixed assets or to its right-of-use assets arising from finance leases for lessees.

When To Use Straight Line Depreciation

He completed a Bachelor of Science degree in Accountancy at Silliman University in Dumaguete City, Philippines. Before joining FSB, Eric has worked as a freelance content writer with various digital marketing agencies in Australia, the United States, and the Philippines. Below is the list of interrelated assets used by ABC Company. Tim is a Certified QuickBooks Time Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content. For more than 200 years businesses have trusted The Hartford. Investopedia requires writers to use primary sources to support their work.

Depreciable property is an asset that is eligible for depreciation treatment in accordance with IRS rules. Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. A half-year convention for depreciation is a depreciation schedule that treats all property acquired during the year as being acquired exactly in the middle of the year. Is the initial purchase or construction cost of the asset as well as any related capital expenditure. Therefore, Company A would depreciate the machine at the amount of $16,000 annually for 5 years.