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 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 will be posted to the Profit and Loss account as an expense.
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 straight line 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|
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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