Straight-Line Depreciation
Straight-line depreciation is an easy and popular method of accounting for depreciation of an asset. This method allows businesses to uniformly spread the depreciation expense over the estimated useful life of the asset in question. The easiest way to calculate the straight-line depreciation expense is to subtract an assets salvage value from its cost and divide the difference by the estimated useful life.
For example, suppose a business purchases a computer for $3,000 which it plans to depreciate over a three year useful life. Further, suppose the business estimates that the computer will be worth $200 at the end of the three years. The business can calculate the straight-line depreciation expense as follows:
Straight-Line Depreciation = ($3,000 – $200) / 3 years = $900 per year
Thus, the business will record an annual depreciation expense of $900 for the computer. This $900 figure will remain constant for the estimated three year period.
Using the straight-line depreciation method does not make a difference when looking at a single year but it does make a difference when looking at an entire asset’s life. For example, the business in the example above will have recorded the same expense ($900) each year for the useful life of the computer. This method helps to spread the total cost of an asset evenly over its estimated useful life instead of recognizing a larger expense when the asset was acquired and a smaller expense (or no expense) in later years.
The straight-line depreciation method is simple, easy to calculate, and it is the most used method of accounting for depreciation. Thus, business have an incentive to use this method in order to make their financial statements comparable with those of other businesses.
In the end, the straight-line depreciation method is a method of spreading the cost of an asset evenly throughout its expected life. This method helps to make financial statements comparable from one business to the next but in some cases, some assets may not be well suited for this method of depreciation. In these cases, companies may opt for an accelerated method of depreciation such as the double-declining or sum-of-the-year’s digits methods.
