Straight Line Depreciation
What is straight line depreciation?
Straight line depreciation is considered as a method through which cost of the plant asset is matched with the period of accounting. Service time plays an important role on the occasion. It is generally counted for a year. Same percentage is considered for the entire duration in case of calculating account through the method of straight line depreciation.
Straight Line Depreciation Example
Through an example, it is possible to make you understand about the straight line depreciation in an effective manner. Equipment has been bought at a price of $ 430,000. It is possible to use the equipment for more than 10 years. In due course, salvage money can come to $ 30,000. Based on the straight line method, it can be said that depreciation with each year is about $ 40,000. Depreciation is noticed during use of the equipment only. Therefore, it is possible to come across at 10% depreciation each year or 1/10. In case the equipment has been purchased in the middle of the year then amount of depreciation for the first year can be about 20,000 which half of total depreciation for an accounting year. Similar things can be continued for another 10 years. Following image shows the nature of the straight line depreciation in adequate manner.
For financial statement, US companies have been using the straight line depreciation method. On the other hand, faster depreciation method has been utilized by the Internal Revenue Service (IRS) in case of income tax returns.
In a uniform manner, reduction is observed with the price of fixed asset through straight line depreciation method. For a certain period, similar amount of depreciation expense is charged on the income statement. It is possible to observe a decline in the form of straight line based on the carrying amount in the balance sheet.
As a result of quick and simple method of straight line depreciation, it has been utilized most commonly as a depreciation method. It is a kind of accounting principle that has been used within the periphery of a company for a fixed asset exclusively. It is possible to get an idea about utilization of the asset in the process. More value is lost at a fixed rate in its initial years. On such occasion, other methods of depreciation can be applied. However, straight line method of depreciation is used in most situations.
Straight Line Depreciation Formula
Through depreciation method of straight line, amount is calculated by dividing depreciable amount with the lifetime of using the asset.
Depreciation Asset: Depreciation Amount ÷ Useful Life
Depreciation Amount= Cost of Asset – Salvage Value
The amount of depreciable can be obtained through deduction of salvage amount from the cost. Through the cost, it is possible to indicate towards an amount at which a fixed asset has been accumulated. On the other hand, salvage value is calculated through its value during end years of its life.
To get the salvage value of the fixed asset, it is generally sold in the market. Through useful life, you may able to determine the number of year for which the asset has been utilized. During this time, complete benefit of the fixed asset is taken.