How to Depreciate Assets Using the Straight-Line Method
When depreciating assets using the Straight-Line method, you spread the cost of the asset evenly over the number of years the asset will be used. Straight-Line is the most common method used for depreciation of assets, and it’s also the easiest one to use. Another advantage of this method is that you can use it for both accounting purposes and tax purposes.
If you use any of the other methods, you have to keep separate depreciation records — one for your financial reports and one for the tax man.
The formula for calculating Straight-Line depreciation is:
(Cost of fixed asset – Salvage) / Estimated useful life = Annual depreciation expense
For the truck in this example, the cost basis is $25,000, the salvage value is $5,000, and the IRS estimate of useful life of five years is being used. With these figures, the calculation for finding the annual depreciation expense of this truck based on the Straight-Line depreciation method is:
($25,000 – $5,000) / 5 = $4,000
Each year, the business’s Income Statement should include $4,000 as a depreciation expense for this truck. You add this $4,000 depreciation expense to the accumulated depreciation account for the truck. This accumulated depreciation account is shown below the truck’s original value on the Balance Sheet. You subtract the accumulated depreciation from the cost basis of the truck to show a net asset value, which is the value remaining on the truck.