Month End Glossary

Straight-Line Depreciation

Straight-Line Depreciation is an accounting method of calculating depreciation in which an asset's value is reduced evenly over its useful life.

Straight-Line Depreciation is the most straightforward and commonly used method of calculating depreciation in accounting. Under this method, the cost of a long-term asset is evenly allocated over its useful life until the residual value is reached. The formula for this method is: (Asset Cost - Residual Value) / Useful Life. For instance, if a piece of equipment costs $10,000, has an expected residual value of $1,000, and a useful life of 9 years, the annual depreciation is ($10,000 - $1,000) / 9 = $1,000 per year. This means each year's depreciation expense will consistently be $1,000.

The simplicity of Straight-Line Depreciation makes it ideal for assets that provide equal benefit over time, like office furniture, facilities, or software. For budgeting and financial reporting, knowing the regular annual depreciation expense aids in comparing year-on-year financial performance. However, it may not be appropriate for assets that lose value more rapidly in their early years, such as technological equipment, where other depreciation methods, like double-declining balance, may be more suitable. This method also aligns with the matching principle in accounting by recognizing expenses consistently with revenues generated by the assets.

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