Straight-line depreciation is a method for calculating yearly depreciation expense for a long-lived fixed asset where an equal amount of depreciation is recognized each year of the asset’s useful life.
To calculate straight-line depreciation, we need three pieces of information. First, we need to know the asset’s cost. Second, we need an estimate of the asset’s salvage value – what the asset can be sold for at the end of its useful life. And third, the asset’s useful life in years.
To calculate yearly depreciation expense under the straight-line method, we subtract the asset’s cost from its salvage value and divide the result by the asset’s useful life.
Yearly depreciation expense = (asset’s cost – salvage value) / years of useful life
For example, a company purchases a piece of manufacturing equipment for $250,000. The equipment’s salvage value is $25,000 and the estimated useful life is 10 years.
The amount of yearly depreciation in the above example is:
(250,000 – 25,000) / 10 = 22,500
The exact amount of depreciation that the company will recognize every year will depend on when the asset is acquired and placed into service. For example, suppose the asset is placed into service on April 1. In this case the company recognizes nine months of depreciation in the first year:
First year of depreciation = (22,500 / 12) x 9 = 16,875
In years two through ten, the company recognizes $22,500 per year in depreciation. In year 11, the company recognizes the remaining three months of depreciation not recognized in the first calendar year:
Year 11 depreciation = (22,500 / 12) x 3 = $5,625
The company still recognizes ten years (ten, 12-month periods) of depreciation, but the calendar year is allocated between nine months in the first year and three months in the 11th year.