Straight line depreciation is the most commonly used and simplest form of depreciation. To calculate straight line depreciation, start with the purchase or acquisition price of an asset and subtract the salvage value. Then you divide by the total productive years the item/asset can be expected to be useful to the company. The expected life of an asset is called its “useful life” in accounting jargon.
Straight Line Depreciation Calculation
(Purchase Price of Asset – Approximate Salvage Value) ÷ Estimated Useful Life of Asset
Example of Straight Line Depreciation:
Lets say we buy a computer for your business at a cost of $5,000. As of today, you can expect to sell it when it is no longer useful (salvage value) at around $200. Federal accounting rules allow computers to have a maximum life of five years. In the past, your company has upgraded computers at least every three years. Since the shorter period is more realistic and it allows you to take a bigger tax deduction, you choose 3 years for the useful life. Using that information, you would plug it into the formula:
($5,000 purchase price – $200 approximate salvage value) ÷ 3 years estimated useful life
Therefore, your business can take a depreciation charge of $1,600 annually for three years if you were using the straight line method.
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