A Plain English Guide to the Straight Line Depreciation Method

Using this method, the cost of a tangible asset is expensed by equal amounts each period over its useful life. The idea is that the value of the assets declines at a constant rate over its useful life. In the article, we have seen how straight line depreciation the straight-line depreciation method can depreciate the asset’s value over the useful life of the asset. It is the easiest and simplest method of depreciation, where the asset’s cost is depreciated uniformly over its useful life.

QuickBooks Enterprise has a fixed asset manager that computes your depreciation expense automatically. You can also store other information like asset number, purchase date, cost, purchase description, serial number, warranty expiration date, and others. There are instances wherein assets used in businesses are interrelated. For example, office desktops, chairs, tables, and copiers are often used together. Hence, it’s sensible to depreciate them as a group instead of depreciating them individually. You can do that by using the straight line approach under the group method.

Straight Line Depreciation Calculator

It means that we expect to retire the asset earlier than asset #2. But since these assets are interrelated, it would be inconsistent to depreciate them individually.

Calculating depreciation accurately will help you avoid an IRS audit or unnecessary penalties for mistakes. Depreciation is recorded in the company’s accounting records through adjusting entries. Adjusting entries are recorded in the general journal using the last day of the accounting period. We record $15,900 per year, which after seven https://www.bookstime.com/ years will be $111,300. We’ll record the final $700 in year eight to arrive at the total cost of $112,000. The small amount of depreciation in year eight is due to the group life being slightly longer than seven years in Step 3. In the list of assets provided by ABC Company, we observed that each fixed asset has different useful lives.

Recording Straight-Line Depreciation

When the organization wants to make the individual record of the assets maintained. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Below, we’ve provided you with some straight line depreciation examples. This means Sara will depreciate her copier at a rate of 20% per year. If you don’t expect the asset to be worth much at the end of its useful life, be sure to figure that into the calculation. The formula consists of dividing the difference between the initial CapEx amount and the anticipated salvage value at the end of its useful life by the total useful life assumption.

• Multiple methods of accounting for depreciation expense exist, but the straight-line method is the most commonly used.
• In order to write off the cost of expensive purchases and calculate your taxes accurately, knowing how to determine the depreciation of your company’s fixed asset is critical.
• The cumulative depreciation is recorded on the balance sheet, and it displays the total depreciation amount from the date the asset was acquired to the date on the balance sheet.
• A company may also choose to go with this method if it offers them tax or cash flow advantages.

Its scrap or salvage value of the asset—the price you think you can sell it for at the end of its useful life. Depreciable property is an asset that is eligible for depreciation treatment in accordance with IRS rules. Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.