What is the Straight Line Depreciation Method?
Straight line depreciation is a common cost allocation method which expenses the same depreciation charge for each year of a long-term tangible asset’s useful life. The future benefits of the asset are expensed at the same rate each year.
The purpose of the depreciation calculation is to spread the cost of the asset over its useful life to the firm. The calculation includes:
- Cost of the asset is the initial acquisition or construction costs plus any related costs to bring the asset into use (e.g. surveyor fees).
- Residual value, also called salvage value, is the estimated proceeds expected from the disposal of an asset at the end of its useful life. Residual value is the portion of an asset’s cost that is not depreciated because it is expected to be recovered at the end of the asset’s useful life.
- Estimated useful life is the time period that the asset is expected to be used by the company from the date it is utilized to the date of disposal or termination. Useful life is expressed in units of years or months.
- Rate of depreciation is the percentage of useful life that is expended in a single period.
Straight Line Depreciation Formula
Straight line depreciation can be calculated using any one of the following formulas:
|a) Depreciation per annum||
(Cost – Residual Value) / Useful life
|b) Depreciation per annum||
(Cost – Residual Value) x Rate of depreciation
|c) Rate of depreciation||
(1 / Useful Life) x 100%
ABC Minitowers buys a small delivery truck on 1 January 2013. Use the data below to calculate the accumulated depreciation expense and book value (carrying amount) for each period using the straight-line method.
|Expected residual value||
|Estimated useful life (in years)||
|Estimated useful life (in kilometers)||
- Calculate the annual depreciation rate at which the delivery truck is being depreciated.
- Calculate the depreciable amount = cost – residual value.
- Work out the depreciation expense per year
- Total accumulated depreciation expense for the five years.
|a) Depreciation rate =||100% ÷ 5 years = 20%|
|b) Depreciable amount =||$13,000.0 – $1,000.0|
|c) Depreciation expense p.a. =||$12,000.0 ÷ 5 = $2,400.0|
|End of year|
|Year||Depreciation expense||x||Depreciation Rate||=||Accumulated depreciation||Book value *|
* $13,000 (Cost) – $2,400 (Year 1 depreciation) = $10,600 (Carrying amount)
Notice that the depreciation expense of $2400 is the same each year, and that the book value at the end of the useful life is equal to the estimated $1000 residual value.