Straight-line method is a method of depreciating fixed assets that recognizes depreciation equally over the periods of an asset’s estimated useful life. Examples of fixed assets are property, plants, and equipment.
Straight-line depreciation complements several other depreciation methods such as declining balances and sum-of-years-digits. Straight-line depreciation is suitable for cheaper goods, such as furniture. We calculate depreciation from the original cost minus the residual value of the asset, divided by the estimated useful life of the asset.
Example and calculation of the straight-line method
Through the straight-line method, we evenly allocate the costs of long-term assets. This method requires the estimation of the residual value and the useful life of the asset. Residual value refers to the amount that a company receives from an asset sale at the end of its useful life.
The formula for straight-line depreciation is:
Depreciation expense = (Cost – Residual value) / Useful life of assets
For example, the ABC company bought a machine for Rp100. The company estimates the machine will remain to produce efficiently for ten years. After that, because of worn out, the company expects to sell it at Rp20.
From this case, the company will recognize a depreciation expense of Rp8 [(Rp100-Rp20) / 10] every year. The company reported a net asset value of Rp92 (Rp100-Rp8) in its balance sheet and a depreciation expense of Rp8 in the income statement at the end of the first year.
This method provides equal depreciation costs for each period over the useful life of assets. In some cases, the residual value is ignored.
It is also the easiest method of calculating depreciation costs. We only need to estimate the residual value of the assets and the years of economic life.
However, no tax benefits the company receives. It contrasts with the accelerated depreciation method, which recognizes a higher depreciation expense in the initial year of asset use. That way, with the accelerated depreciation method, companies get a higher tax reduction in the initial years of the asset.