Straight line depreciation is the most common method used in calculating the depreciation of a fixed asset. The same amount is depreciated each year that the asset has a useful life.
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.
Straight Line Depreciation Calculation
To calculate the straight-line method, you use the following process:
- Find the initial cost of the asset; this is usually found on the purchase invoice.
- Subtract the estimated salvage value; this is the value of resale at the end of its useful life.
- Decide the useful life of the asset. Examples might be 3 or 5 years, some equipment items maybe 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 value of the asset at the end of each year.
Most businesses produce a P&L account monthly, so the depreciation needs to be calculated 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 the 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. It is 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. The calculator works for both straight line method and reducing balance.
The easiest way of keeping track of all the fixed assets and depreciation is in Excel or a good accounting package. We have produced a simple easy to use depreciation schedule. The schedule allows you to list all the assets, the number of years to depreciate an item and details of the assets. The figures are calculated for you.
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