All assets depreciate over time. Therefore, whenever you buy any asset for your business, like new buildings, machines, or computers, it will depreciate over time. After it depreciates over its useful life, it?s sold off at the final remaining value – its salvage value. Here, the easiest way to calculate depreciation is the straight line depreciation method.

If you wish to know in-depth information on this form of depreciation and how to calculate it, read this post till the end!

What Is Straight Line Depreciation?

Straight line depreciation is one of the most commonly used methods for calculating depreciation. In this method, it?s estimated that the value of an asset depreciates by the same amount every year throughout its useful life span. Therefore, its value depreciates by the same amount every year until it reaches its salvage value.

This depreciation value is used for calculating the net operating income of the firm.

When To Use Straight Line Depreciation?

Straight line depreciation is best used on assets that depreciate automatically over time by the same amount. Therefore, this method is best used on assets that remain stationary throughout and depreciate slowly over time for many years. Typically, this method is best used for assets like furniture, warehouses, buildings, etc., which depreciate by the same amount annually.

How To Calculate Straight Line Depreciation?

In this method, the salvage value of an asset is estimated when the asset is bought. Here, an appraiser is hired to apprise the asset so that its final salvage value after its useful lifespan can be calculated.

Therefore, now that the final salvage value of the asset gets calculated, it now becomes easier to calculate depreciation. All you have to do is subtract the salvage value from the initial book value of the asset. Here?s the straight line depreciation formula to calculate accumulated depreciation:

Here?s an example of this depreciation equation in action:

Benefits And Drawbacks Of Straight Line Depreciation

Using straight line depreciation has many benefits and drawbacks.

Pros

The advantages of straight line method depreciation are:

• Straight line depreciation is pretty easy to calculate since the calculations are simple and require easy-to-attain values for calculation.
• This form of depreciation can be used to calculate depreciation for various fixed assets, which depreciate over time automatically.
• It’s easier to schedule depreciation using the straight line method, which helps in reducing the overall amount required for bookkeeping.

Cons

The main disadvantages of straight line depreciation are:

• There are many assets that are depreciated better off on their output, making the units of depreciation method more viable.
• Some additional calculations are necessary after calculating using this depreciation equation. This is because for calculating tax as per USA Tax Guidelines, MACRS recovery periods should be included.
• Many assets like vehicles and computers depreciate faster earlier and slowly later on. This is where the sum-of-the-years digits method is more viable.
• The salvage amount set by the appreciator is inconsistent since different asset appreciators will give different salvage values.

Other Depreciation Calculation Methods

Apart from straight line depreciation, there are various other methods to calculate depreciation. Here, the most widely acknowledged depreciation methods as per the GAAP (Generally Accepted Accounting Principles) are:

1. Declining Balance Method

As per this method, your assets depreciate at a fixed rate (depreciation percentage) every year. Therefore, since the same rate of depreciation is taken into account, the amount of depreciation declines every year. However, the salvage value of the asset is subtracted from the net book value of the asset every year for calculation.

Here?s the formula:

Here?s how this formula is applied:

2. Double Declining Balance Method

The double declining balance method (also known as accelerated depreciation) is similar to the straight-line depreciation and declining balance methods. However, the only difference here is that the rate of depreciation is doubled here. The rate is kept the same across all useful years of the asset.

For the sake of simplicity, the rate of depreciation is twice 100%, which is divided by its useful life in years. Here?s the formula, divided into three steps:

Here?s how this formula is applied:

3. Sum-Of-The-Years Digits Method

In this depreciation method, most of the depreciation is recorded at the start. Therefore, as it nears the end of its useful life, the depreciation recorded gets lower and lower. This calculation is done by adding up the digits of the useful years and then depreciating accordingly.

Therefore, the formula here is:

Here?s an example of how this works:

4. Units Of Production Method

In this depreciation method, the total output produced by the asset is considered. After that, the output consumed annually is then recognized.

Its formula is:

Here?s an example:

Conclusion

Calculating depreciation using the straight line depreciation method is simple as long as you know the useful life of the asset and its salvage value at the end of its useful life. This makes this form of depreciation calculation better suited for assets like furniture, buildings, etc – since they depreciate slowly by the same amount over a long time.

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