The straight line depreciation method is the most commonly used method for the calculation of depreciation expenses on income statements because it’s the simplest one. One look at the straight line depreciation formula and you might feel intimidated by it. But it’s actually quite easy to learn, especially since it has a straightforward calculation. If you want the task to become even easier, you can use this straight line depreciation calculator.
How to use the straight line depreciation calculator?
Using this depreciation expense calculator is a breeze, especially when you compare it to the manual calculation. It’s a convenient tool which you can perform the calculations for you or which you can use to check the correctness of your manual computation. Here are the steps for you to follow:
- First, enter the monetary values for the Asset Cost and the Salvage Value.
- Then enter the value for the Useful Life in years.
- Select the Starting Month from the drop-down menu then enter the value for the Starting Year.
- Then select the Convention from the drop-down menu. You can choose from Full-Month, Mid-Month, Mid-Quarter or Mid-Year.
- After entering all of the required information, the straight line depreciation calculator will automatically generate a straight line depreciation table for you. Also, it will show you a graph which shows the results.
How do you calculate straight line depreciation?
If you want to calculate using the straight line depreciation method, use the straight line depreciation formula:
Straight Line Depreciation = (Purchase Price of Asset – Approximate Salvage Value) ÷ Estimated Useful Life of Asset
To help you understand this better, let’s have an example. Let’s say that you’re a business owner and you want to purchase a new computer server which costs $5,000. According to your estimation, at the end of the server’s useful life, it will have a salvage value of $200 which you will get from selling the parts.
Most accounting rules set the maximum useful life of computers at five years. But as per your experience, you may have purchased new hardware every three years to ensure that your employees work with the best equipment. This would be a better estimate of the useful life and you can start with your computation using the above formula:
Straight line depreciation = ($5,000 – $200) ÷ 3 years = $1,600
As per the straight line calculation, this refers to a drop in the value of the asset. The depreciation of this asset gets spread evenly across its useful life. Therefore:
Depreciation in Any Period = ((Cost – Salvage) / Life)
What is an example of straight line depreciation?
The straight line depreciation method is very useful in recognizing and evenly carrying the amount of a fixed asset over its useful life. You use it when there’s no specific pattern to how you would use an asset over a period of time. As aforementioned, this is the easiest depreciation method as it results in very few errors in calculation.
After performing the calculation, record the depreciation expense in your accounting books as a credit to your account for accumulated depreciation but as a debit to your account for depreciation expense.
Here is an example of a straight line depreciation:
The situation is that a company purchases a piece of machinery that’s worth $60,000. It has an estimated useful life of 5 years and $10,000 as its salvage value. With this information, you can calculate the machine’s straight line depreciation using the formula:
$60,000 –$10,000 = $50,000
Then calculate the useful life of the machine each year:
1/5 = 20% depreciation annually
To complete the computation:
20% x $50,000 = $10,000 depreciation each year
If you want to check the accuracy of your computation, you can use the straight line depreciation calculator.
How do I calculate depreciation expense per unit?
Using the method of units of production, the depreciation amount charged to expenses varies and it’s directly proportional to the asset’s usage amount. This means that businesses have the right to charge higher depreciation in times when they use the asset more. Then they can charge lower depreciation in times when they use the asset less.
This is a more accurate way to charge depreciation since it’s more closely related to an asset’s usage. However, this method also requires you to keep track of the usage of your asset which means that it might be more applicable to the assets with higher values.
Aside from this, you also need to make an estimation of the asset’s total usage life so you can use that amount for your computation. When it comes to calculating the depreciation expense per unit, follow these steps:
- Come up with an estimation of how many hours you will be able to use the asset. Or you can also come up with an estimation of how many units the asset can produce during its useful life.
- Subtract the salvage value you’ve estimated from the asset’s capitalized cost. Then divide the estimated total production or usage from the net depreciable cost. In doing this, you would get the value of the depreciation cost per production unit or per usage hour.
- Multiply the number of usage hours or production units by the cost of depreciation of each unit or hour. This will give you the total expense for depreciation for that accounting period.
- If there’s a change in the number of usage hours or production units over time, incorporate the new values into your calculations. This will modify the depreciation expense. However, any estimation changes won’t have any effect on the depreciation which you’ve already recognized.
It’s not advisable to use this method if there’s no significant difference in the usage of assets from one period to another. This might result in you having to spend too much time keeping track of the asset’s usage. However, you’ll only get results which have very slight differences compared to if you used the straight line depreciation method.
Also, this method isn’t cost-effective if the information you get as a result isn’t used by the people who go through the financial statements of the company. This means that the cost that’s associated with the production of depreciation information that’s more accurate might not prove valuable, especially if it doesn’t result in specific actions.