Straight line depreciation definition

You can then record your depreciation expense to the general ledger while crediting the accumulated depreciation contra-account for the monthly depreciation expense total. The accumulated depreciation account has a normal credit balance, as it offsets the fixed asset, and each time depreciation expense is recognized, accumulated depreciation is increased. An asset’s net book value is its cost less its accumulated depreciation. The other popular methods used in calculating depreciation value are; Sum of years method or unit of production method and double declining balance method. When calculating a business’s contra account, bad debts, depletion and depreciation of the company’s assets are all crucial deductions to make.

• Is the initial purchase or construction cost of the asset as well as any related capital expenditure.
• It allows you to calculate your yearly tax obligation based on the cost, residual value, number of years that you expect to use the asset, and rate of straight-line depreciation.
• You would use straight-line depreciation during the time that you own the asset and take a deduction for this portion of the total cost, and then switch to MACRS depreciation when you sell the asset.
• From buildings to machines, equipment and tools, every business will have one or more fixed assets likely susceptible to depreciate or wear out gradually over time.
• All of these methods are GAAP-compliant except for MACRS, which is required by the IRS for U.S. tax purposes.
• An asset’s net book value is its cost less its accumulated depreciation.

The most important difference between this formula and other common depreciation formulas is the denominator. Other methods have a denominator of 1 or 1/2 depending on whether an asset was acquired during its first year or after it had been in use for 1 year. The denominator in straight-line depreciation is 1/ Estimated Useful Life, which has the effect of making 1/ Estimated Useful Life much larger than 1 or 1/2 when an asset is new. This is another form of accelerated depreciation, and it can be used with any depreciation method.

Straight Line Depreciation Calculator for Determining Asset Value

Whereas the depreciable base is the purchase price minus the salvage value. Depreciation continues until the asset value declines to its salvage value. To find the yearly How To Calculate Straight Line Depreciation depreciation amount using the double-declining method, multiply the value of the asset at the beginning of the year by twice the straight line depreciation percentage.

The double-declining balance method is a form of accelerated depreciation. It means that the asset will be depreciated faster than with the straight line method. The double-declining balance method results in higher depreciation expenses in the beginning of an asset’s life and lower depreciation expenses later. This method is used with assets that quickly lose value early in their useful life.

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The Excel equivalent function for Straight-Line Method is SLN will calculate the depreciation expense for any period. For a more accelerated depreciation method see, for example, our Double Declining Balance Method Depreciation https://kelleysbookkeeping.com/ Calculator. Company KMR Inc. has purchased a new delivery truck for an all-in purchase price of $100,000 . It paid with cash and, based on its experience, estimates the truck will likely be in service for five years .