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Straight-Line Depreciation: A Simple Introduction

By Nick Zarzycki on February 19, 2019

“Things fall apart”, to quote the poet W.B. Yeats. Some things apart faster than others.

As buildings, tools and equipment wear out over time, they depreciate in value. Being able to calculate depreciation is crucial for getting the right tax write-off for expensive purchases, and for doing your taxes properly.

Here we’ll go over the most popular method of calculating depreciation: the straight-line method. We’ll show you how to calculate it, how it’s different from other methods, and why it’s so popular.

What is straight-line depreciation?

Straight-line depreciation is a simple method for calculating how much a particular asset depreciates (loses value) over time.

The straight-line depreciation method assumes a constant rate of depreciation. It calculates how much a specific asset depreciates in one year, and then depreciates the asset by that amount every year after that.

If you visualize straight-line depreciation, it would look like this:

Straight-line depreciation

Straight line depreciation graphic (1)

This is where the “straight line” in “straight-line depreciation” comes from.


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How to calculate straight-line depreciation

You need three numbers to calculate straight-line depreciation for an asset:

  1. The total purchase price of the asset (including shipping, taxes, installation fees, etc.)

  2. Its scrap value—the price you think you can sell it for once it’s no longer useful.

  3. The asset’s useful life—how many years you think it will last.

To calculate straight-line depreciation for your asset, simply subtract the scrap value from the purchase price to get total depreciation, then divide that by useful life to get yearly depreciation:

Yearly depreciation = (purchase price - scrap value) / useful life

According to straight-line depreciation, this is how much depreciation you have to subtract from the value of an asset each year to know its true value.

A note on useful life: if you’re calculating straight-line depreciation for tax purposes, the useful life figure should come from the IRS, which has sorted most assets into one of seven "property classes." (Property that depreciates over three, five, seven, 10, 15, 20 and 25 years, respectively.)

Straight-line depreciation in action

Let’s say your business buys a $2,000 MacBook that won’t be useful after five years, and that you think you can sell for scrap in five years for $500. (Five years is the period over which the IRS says you have to depreciate computers.)

To determine straight-line depreciation for the MacBook, you have to calculate the following:

Yearly depreciation = ($2000 - $500) / 5 years

= $1,500 / 5 years

= $300

According to straight-line depreciation, your MacBook will depreciate $300 every year.

How is straight-line depreciation different from other methods?

Things wear out at different rates, which calls for different methods of depreciation, like the double declining balance method, the sum of years method, or the unit-of-production method.

Compared to the other three methods, straight line depreciation is by far the simplest.

Look at how much the MacBook in the example above depreciates every year, according to straight-line depreciation:

Year 1 depreciation: $300

Year 2 depreciation: $300

Year 3 depreciation: $300

Year 4 depreciation: $300

Year 5 depreciation: $300

Now let’s look at how much that same MacBook would depreciate under the double declining balance and the sum of years methods:

Double declining method Sum of years method
Year 1 depreciation: $800 Year 1 depreciation: $500
Year 2 depreciation: $480 Year 2 depreciation: $400
Year 3 depreciation: $220 Year 3 depreciation: $300
Year 4 depreciation: $0 Year 4 depreciation: $200
Year 5 depreciation: $0 Year 5 depreciation: $100

Notice how both of these methods apply more depreciation at the start of the life of an asset than at the end of it.

This can be useful for tax purposes, and can also be more accurate. (Most tangible assets like computers, vehicles and machinery tend to lose a majority of their value in the first few years of use.)

The unit-of-production method is similar to straight-line depreciation, except for one thing: instead of measuring depreciation using dollars, it measures it in units of production instead.

Units of production can be anything: the number of labels printed by a label printing machine, number of miles travelled by a vehicle, or the number of kilowatt hours produced by a power plant.

To calculate depreciation using the unit-of-production method, you need two more pieces of information:

  1. The number of units an asset produced that year

  2. The total number of units you expect it to produce over its lifetime

Plug those figures into the following equation to get the total depreciation of your asset, measured in number of units:

yearly depreciation in # of units =

(purchase price - scrap value) x (# of units produced that year) / total # of units expected over lifetime

This method works best for equipment and tools that wear out with use—as they produce a certain number of units, travel a certain number of miles, produce a certain amount of electricity, etc.—rather than over time.

When should I use the straight-line method?

To deduct certain expenses on your taxes

Depreciation is an expense, just like any other business write-off. So you’ll want to make sure you get all tax savings you can by calculating depreciation properly.

Most businesses use some form of the double declining or sum of years method to calculate depreciation on their taxes, because it results in more write-offs near the beginning of the life on an asset. (The IRS has a very specific system for this called the Modified Accelerated Cost Recovery System, or MACRS.) In some cases, the IRS might even let you deduct the full cost of certain asset (like vehicles, computers and office furniture) during its first year of use, which gets rid of the need for depreciation methods altogether. (Accountants call this a Section 179 deduction.)

But the IRS doesn’t let you use the accelerated/MACRS or Section 179 for certain assets, including intangible assets like software, copyrights, patents and trademarks, which means you need to use straight-line depreciation for those.

Businesses use Form 4562 to calculate depreciation for tax purposes.

To figure out the value of your business

You can’t get a good grasp of the total value of your assets unless you figure out how much they’ve depreciated. This is especially important for businesses that own a lot of expensive, long-term assets that have long useful lives.

Whether you’re creating a balance sheet to see how your business stands or an income statement to see whether it’s turning a profit, you need to calculate depreciation. The straight-line method is a great way to do that quickly.

How does straight-line depreciation factor into my accounting?

Let’s say you’re using straight-line depreciation to calculate the depreciation expense for all of your company’s assets (in this case, let’s say it’s 10 MacBooks) for that particular month. You figure out that the total depreciation for all of your assets that month is $250. What do you do then?

In this case, you’d make the following entry in your books:

Debit Credit
Depreciation expense $250
Accumulated depreciation $250

You would debit a depreciation expense of $250 for that month, which would show up on your income statement. (Depreciation expenses are classified under “operating expenses” on the income statement.)

You would also credit a special kind of asset account called an accumulated depreciation account. These accounts have credit balance (when an asset has a credit balance, it’s like it has a ‘negative’ balance) meaning that they decrease the value of your assets as they increase.

Further reading: Debits and Credits: A Simple, Visual Guide


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Why it matters for your business

Straight-line depreciation can help you quickly calculate how much a certain asset has depreciated in value over time using only three pieces of information: purchase price, scrap value and useful life.

Other methods might be more accurate and more beneficial for tax purposes. But if you’re not an accountant, don’t really know what depreciation is, and want a simple and (literally) straightforward way of calculating it, the straight-line method is a great place to start.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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