Straight Line Depreciation Method
Straight line depreciation is one of the most commonly used methods of depreciation. It is also referred to as the straight line method or the linear method. Under this method, an asset is depreciated equally over its useful life. It is the simplest and most widely used method of depreciation.
The calculation for straight line depreciation is straightforward. First, you need to estimate the useful life of the asset. This amount will vary depending on its expected use and - when applicable - the local regulations that govern the use of the asset. For example, a piece of machinery may have a useful life of 10 years, while a machine tool may only have a useful life of 5 years.
Once you have estimated the useful life of the asset, you need to calculate the depreciation expense for the period in question. This is done by taking the cost of the asset, less any estimated salvage value, and divide it by the number of years the asset is assumed to last. The result of this formula is the annual depreciation expense. For example, if an asset had a cost of $20,000 and an estimated useful life of 5 years, then the annual depreciation expense would be $4,000 ($20,000 divided by 5 years).
Straight line depreciation can also be used for leasehold improvements. Leasehold improvements are considered integral to the leased space and are depreciated over the length of the lease. This method is different from the capitalization of lease expenses, which is used to record an asset and its related expenses in one transaction.
The straight line depreciation method is a popular choice as it is simple to use, easy to understand and provides a consistent rate of depreciation. It also makes it easy to compare the results of one asset against another, as their depreciation expense is based on the same ratio. The method does have some drawbacks however. As the annual depreciation rate does not fluctuate, it does not accurately reflect the reduced usefulness of an asset as it wears out over time.
Despite its potential drawbacks, the straight line depreciation method is widely accepted for preparing financial statements. It is also preferred under Generally Accepted Accounting Principles, or GAAP. It is important to note however that this method is only one of many, and each organization should evaluate its methods to ensure they are doing what is best for their particular situation.