What is the Straight-Line Depreciation Formula? How to Calculate Straight-Line Depreciation Video & Lesson Transcript
Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. With this cancellation, the copier’s annual depreciation expense would be $1320. Let’s break down how you can calculate straight-line depreciation step-by-step.
The salvage value is the amount the straight line depreciation is worth at the end of its useful life. Whereas the depreciable base is the purchase price minus the salvage value. Depreciation continues until the asset value declines to its salvage value. The estimated useful life value used in our calculations are for illustration purposes. If you are calculating depreciation value for tax purposes, you should get the accurate, useful life figure from the Internal Revenue Agency . When keeping your company accounting records, straight line depreciation can be recorded on the depreciation expense account as debit and credit on the accumulated depreciation account.
Example and calculation of the straight-line method
The first step is to calculate the numerator – the purchase cost subtracted by the salvage value – but since the salvage value is zero, the numerator is equivalent to the purchase cost. According to straight line depreciation, the company machinery will depreciate $500 every year. Determine the initial cost of the asset that has been recognized as a fixed asset. However, it costs another $100 to ship the copier to the office. Salvage value is deducted from its purchase price the difference is then divided by the estimated useful years of the asset.
The value of the car here is said to be decreasing (i.e. depreciating) over time. It does not account for the effect that economic conditions, such as inflation and deflation, may have on the value of an asset.
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The fixed cost of the asset is $500,000 and the estimated residual value is $25,000. The estimated market value of an asset at the end of its usage life is called salvage value. This can be found by performing a market analysis or by consulting with industry experts. Industry experts may be able to provide more accurate salvage value estimates than general market analysis.
What is the straight-line depreciation formula?
Depreciation = (Cost – Salvage Value) / Useful life
Straight line basis can be determined by subtracting the cost of the asset and the expected salvage value, and dividing the amount by the expected number of years the asset will be used. In addition to straight line depreciation, there are also other methods of calculating depreciation of an asset. Different methods of asset depreciation are used to more accurately reflect the depreciation and current value of an asset.