Start a free 7 day trial on our Business Plus plan.

What is straight line depreciation?

Straight Line Depreciation Formulas & Examples

Straight line depreciation is the most common method that describes how the value of an asset decreases over time. Depreciation is an accounting term that quantifies the decrease in value over time of a tangible asset. Tangible assets go through a finite life cycle and are useful for a set period of time, before they are disposed or replaced. To effectively manage assets with increased productivity, it helps to have a fairly accurate method to measure equipment depreciation.

What is straight line depreciation?

Straight line depreciation shows how an asset’s value decreases over time. It’s a straightforward calculation that assumes a uniform rate of reduction in value. Graphically, this method is represented by drawing a line from the asset’s purchase price down to its value at the end of its useful life.

A typical straight-line depreciation graph would look like the following:

Straight line depreciation
In UpKeep, you can see how an asset’s value decreases over time. This chart demonstrates an asset depreciating between January 2018 and January 2029, showing a useful life of 11 years.

How does straight line depreciation compare with other methods?

Straight line depreciation is the simplest and most convenient way to describe the devaluation of an asset. With straightforward requirements, it is a versatile method that is applicable to most businesses and industries.

Apart from the straight line basis, other methods are available with more specific and targeted applications. One might prefer other methods to describe depreciation, depending on the nature of the business or the type of the asset. Some examples of these methods are:

1. Units of production

Units of production assumes depreciation to be directly linked to the amount of time that the asset is being used. By quantifying the number of units produced, it estimates the utilization hours required to make the units. The length of operating time is then used to calculate to the devaluation of an asset.

This method is regarded as the most accurate representation of devaluation, as it more closely reflects the actual wear and tear that assets go through. However, the increased accuracy comes with a price. When using the units of production method, more resources are needed to collect enough data over long periods of time. Because of additional efforts required for this method, it is typically used for higher-value equipment.

2. Sum-of-years-digits

Remember how the straight line method assumes a constant rate of depreciation? The sum-of-the-years’-digits method deviates from this by accelerating the depreciation rate, instead of assuming it to be constant. In other words, this method expects an asset to have higher depreciation rates within the first years of its useful life. The rate of devaluation then decreases over time until it reaches the end of its useful life.

This method of accelerating the depreciation is applicable to assets that are expected to deteriorate more quickly than others. It can be a more realistic representation for assets that significantly reduce production capacities over time.

3. Double declining balance

The double declining balance method is another example of an accelerated depreciation method. For this method, the rate of depreciation is assumed to be twice the rate of the straight line method. While the name suggests “doubling” the straight line depreciation rate, the declining balance can actually be tweaked to suit the asset. Values for declining balances can be taken as 1.5x or even 2.5x the straight line depreciation rate, if required.

Why is straight line depreciation important for maintenance teams?

Depreciation is an accounting method, and accounting is not the first thing you might associate with maintenance. Maintenance teams are more commonly regarded as hands-on experts in keeping equipment in tip-top form. What isn’t obvious, is how data from maintenance activities can be used for bookkeeping.

Maintenance workers would update and add entries to the computerized maintenance management software (CMMS) as part of their day-to-day work. This information is useful for the finance department, as it provides an accurate breakdown of costs to maintain an asset. One can determine a complete picture of the financial worth of an asset, when coupling it with an enterprise asset management (EAM) software that tracks asset values .

Working between two software systems sounds simple in principle. However, when accounting for every asset in the plant, calculating financials could get really tedious. Some CMMS providers solve this issue by having a depreciation tracking functionality. This essentially puts all the asset-related information in one place, so you can easily make more sense of it.

Take, for example, any new or existing equipment that you have in your plant. Your CMMS can track an asset’s value and anticipate depreciation over its useful life. Using the straight line depreciation method, you can set expectations on how the total devaluation of an asset will be distributed over time. At any point in an asset’s useful life, its projected depreciation can give you hints on whether it is more financially beneficial to repair the asset, or to replace it altogether.

3 ways you can take advantage of straight-line depreciation

1. Know the value of your assets and your facility

Purchasing new assets can reflect as a huge initial cash flow. However, depreciation affects the value of assets over time. For accounting purposes, using straight line depreciation acknowledges that the initial investment will be used for years. By factoring in depreciation, you are providing an outlook of how the assets will provide value over an expected time span. This helps provide a more accurate representation of how well a business is doing, especially after the acquisition of new assets.

2. Reduce taxes

Depreciation affects tax value, at the end of a fiscal year. Because depreciation is considered as a business expense, it reduces the actual earnings on which taxes are based. With a reduced taxable income, one spends less on taxes because their overall tax amount is also reduced.

3. Improve asset management

Straight-line depreciation gives valuable insight on how close an asset is to reaching the end of its useful life. After depreciation, an asset is only worth its salvage value – the estimated resale value after its useful life. Considering maintenance costs and comparing them to the estimated value of an asset, deciding whether to keep or replace an asset can be done more confidently.

How to calculate straight line depreciation

Using the straight line depreciation method, the annual depreciation expense of an asset can be calculated by performing the following steps:

Step 1: Determine the cost of the asset

The cost of the asset is equivalent to the purchase price or acquisition cost of the asset.

Step 2: Estimate the asset’s salvage value

An asset’s salvage value is also known as the “scrap value”. This is equivalent to the estimated resale value of the asset at the end of its useful life.

Step 3: Calculate the total depreciable amount

Subtract the estimated salvage value from the cost of the asset to determine the total depreciable amount.

Step 4: Determine the useful life of an asset

The useful life on asset is the approximate time that an asset is operational (usually in years). This value is usually estimated from previous data on similar or comparable equipment.

Step 5: Calculate the annual depreciation expense

Divide the total depreciable amount (calculated value from Step 2) by the useful life of an asset (value from Step 4).

Straight line depreciation formula

In formula form, the calculation steps can be expressed as:

Annual depreciation expense = (Cost of the asset – Salvage value of the asset)/Useful life of the asset

Another way you could save time is to directly input all information in this Straight Line Depreciation Calculator.

Straight line depreciation example and application

Various assets in a facility will be expected to depreciate at different rates. A maintenance team member learns from intuition and experience to sense when an asset is reaching the end of its useful life. The following example can help break down and quantify what you might have already experienced in a plant.
For example, if your company purchases new equipment for $100,000. The salvage value is expected to be $20,000, with an estimated useful life of 8 years. Using the steps discussed earlier, the annual depreciation cost is determined below:

Step 1: Cost of the asset

The cost of the asset is equivalent to the purchase price = $100,000.

Step 2: Salvage value of the asset

The salvage value is $20,000.

Step 3: Calculate the total depreciable amount

The total depreciable amount is equal to = ($100,000 – $20,000) = $80,000.

Step 4: Determine the useful life of an asset

Estimated useful life is 8 years.

Step 5: Calculate the annual depreciation expense

The annual depreciation expense is ($80,000/8 years) = $10,000 per year.

In formula form:

Annual depreciation expense = ($100,000 – $80,000)/8 years = $10,000/year

FAQ

What are the 4 depreciation methods?

Four common methods to determine depreciation are – 1) straight line, 2) units of production, 3) sum-of-years’-digits, 4) double-declining balance.

Is straight line depreciation the same every year?

Yes. In straight line depreciation calculations, the depreciation expense is the same every year.

Why would a company use straight line depreciation?

Straight line depreciation is the simplest calculation method to quantify depreciation costs. It is a versatile method that applies to most long-term assets and equipment.

Is straight line depreciation a fixed cost?

Straight line depreciation is a fixed cost and is expected to be the same for each year. The cost stays with same with usage or any other parameter.