Straight Line Depreciation

Straight line depreciation is the most common method used in calculating depreciation of a fixed asset. The same amount is depreciated each year that the asset has a useful life.

Furniture depreciation example

A business spends £5,000 on furniture, which is expected to have a useful life of 5 years.

Rather than entering £5,000 as an expense on the Profit and Loss account in year one, the business posts the asset to the Balance sheet and reduces it by a fixed amount each month or year. The amount will be posted to the Profit and Loss account as an expense.

Calculation

Asset Value / period of time = Depreciation amount

£5000 / 5 years = £1000 per year

The chart below shows the value of the asset at the end of each year.

Most businesses produce a P&L account on a monthly basis, so the depreciation needs to be worked out per month.

£5000 / 60 months = £83.33 per month

Car depreciation example

If a business purchases a new car they would expect the car to have a resale value at the end of its useful life for the business.

A business purchases a car for £8,000 and is expecting to use it for 3 years; they are also estimating it will have a resale value of £2,000 (residual value) at the end of the 3 years.

(Cost of car - Residual value) / Expected life

(8000 - 2000) / 3

= £2000 per year

The depreciation amount is posted in the Balance sheet to reduce the cost of the Asset and also posted in the P&L as an expense.

The Balance sheet for each year for the car assets will be as follows:

	Fixed Assets	Depreciation	Value of Assets
Year 1	8000	2000	6000
Year 2	8000	4000	4000
Year 3	8000	6000	2000

When the car is sold at the end of the 3 years an adjustment is made to reduce the asset value to 0.

For help with the calculation please visit the depreciation calculator.

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