Straight-Line Depreciation
Annual depreciation of an asset.
Formula
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Example
A $12 000 asset with $2000 salvage over 5 years depreciates (12000−2000)/5 = $2000/year.
How it works
Straight-line depreciation assumes an asset loses the same amount of value each year over its useful life. The formula takes the amount that can actually be depreciated, which is the original cost minus the salvage value, and spreads it evenly across the number of years. This gives a simple annual depreciation charge for accounting and planning purposes.
When to use it
Use this when an asset is expected to wear out or become obsolete gradually and roughly evenly, such as office equipment, furniture, or machinery. It is common in basic accounting problems and in situations where a simple fixed yearly depreciation amount is needed.
Worked example, step by step
A machine costs $18,500 and is expected to have a salvage value of $2,500 after 8 years. D = (C - S) / n D = (18,500 - 2,500) / 8 D = 16,000 / 8 D = 2,000 The annual straight-line depreciation is $2,000 per year.
Common mistakes to avoid
- Subtracting the salvage value from the yearly depreciation instead of from the original cost
- Using the asset's current value in the formula instead of the original cost
- Forgetting to divide by the full useful life in years
Did You Know?
Straight-line depreciation spreads an asset's cost evenly over its useful life for accounting.
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