Straight Line Depreciation – Free Download and Examples

Straight-line depreciation is an accounting method used to allocate the cost of fixed assets over their useful life. This method, known for its simplicity, spreads the cost evenly across the years an asset is expected to be in service. In the world of accounting and finance, it’s crucial to understand how assets lose value over time – a process called depreciation.

What is Depreciation?

Depreciation is a method used to account for how assets lose value over time due to factors like wear and tear, obsolescence, and more. Imagine how a car loses value yearly as it ages and racks up mileage.

Businesses use depreciation to spread out the cost of an asset over its useful life, which helps them get a clearer picture of their financial performance by matching expenses with the revenue the asset generates.

This post will examine the straight-line depreciation method, compare it to other methods, and provide examples from the accounts.

Different Depreciation Methods

When it comes to accounting for the depreciation of fixed assets, businesses have several methods to choose from. Each method has advantages and is suitable for different types of assets and financial strategies. Here are some of the most common depreciation methods:

1. Straight Line Depreciation Method

The straight-line depreciation method is the most straightforward and most popular approach. It evenly distributes the cost of a fixed asset over its useful life. To calculate the annual depreciation expense, subtract the estimated salvage value from the asset’s initial cost and divide it by the useful life. This method suits assets that lose value at a steady rate.

2. Reducing Balance Method

The reducing balance method, also known as the declining balance method, is an accelerated depreciation method that results in higher depreciation expenses early in an asset’s life. This is useful for assets that quickly lose value. Depreciation is calculated by applying a fixed percentage to the asset’s book value, leading to decreasing depreciation amounts each year.

3. Double Declining Balance Method

This is another accelerated depreciation method that doubles the rate of the reducing balance method. This method is suitable for assets that rapidly lose their value.

4. Units of Production Method

This method calculates depreciation based on actual usage or production output, ideal for machinery and equipment. Depreciation is determined by the cost per unit produced multiplied by the number of units produced during a specific period.

5. Sum-of-the-Years-Digits Method

This method calculates depreciation using the sum of the years of an asset’s useful life. It results in higher depreciation expenses initially, decreasing over time, making it ideal for assets that lose value faster at the start.

Straight Line Depreciation vs Reducing Balance Method

The chart below shows the difference between straight-line depreciation and reducing balance depreciation. As you can see, the straight line basis reduces the value of the asses evenly. The reducing balance method reduces it much quicker over the first years, and then it slows down.

Furniture Straight Line 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 is posted to the Profit and Loss account as an expense.

Calculate Straight Line Depreciation Formula

To calculate the straight-line method, you use the following process:

• Find the asset’s initial cost, usually found on the purchase invoice.
• Subtract the estimated salvage value; this is the resale value at the end of its useful life.
• Decide the useful life of the asset. Examples might be 3 or 5 years, and some equipment items may be longer.
• Use the formula below to calculate the depreciation rate.

Asset Value – salvage value/period of time = Depreciation amount

£5000 / 5 years = £1000 per year

The chart below shows the asset’s value at the end of each year using the straight-line depreciation method.

Most businesses produce a P&L account monthly, so the depreciation needs to be calculated per month.

£5000 / 60 months = £83.33 per month

Computer Straight-Line Depreciation Example

Let’s consider a business that purchases a computer for £1,000, with an estimated salvage value of £100 at the end of its useful life of 3 years. Using the straight-line depreciation method, we can calculate the annual depreciation expense as follows:

(Cost of the computer – Salvage value) / Useful life

(1000 – 100) / 3

= £300 per year

Each year, the annual depreciation amount of £300 is recorded on the Balance sheet in the accumulated depreciation account to reduce the computer’s asset cost gradually. This amount is also posted as a depreciation expense account entry in the Profit and Loss account.

The Balance sheet for each year for the computer asset will be as follows:

At the end of the 3 years, when the computer is expected to reach its salvage value, the asset value is adjusted accordingly. This straightforward calculation helps businesses manage their financial statements effectively.

Straight Line Method and Accounting Software

Accounting software like Xero or QuickBooks can record fixed assets and calculate depreciation, simplifying business financial management. These tools automate the tracking of asset values and the calculation of depreciation, minimising errors that can occur with manual processes.

Calculating Depreciation

For help with calculating depreciation, please visit the depreciation calculator. It works for both the straight-line method and reducing balance.

Depreciation Schedule

The easiest way to keep track of all the fixed assets and depreciation is in Excel or a good accounting package. We have produced an easy-to-use depreciation schedule. The schedule allows you to list all the assets, the years to depreciate an item, and details of the assets. The figures are calculated for you.