Straight-line depreciation is the most commonly used depreciation method for our customers. In For-Profit organizations, the traditional form of this method only applies to assets placed in service before 1981. Calculating depreciation using the straight-line method uses the asset's original cost and the estimated useful life of the asset to determine the amount of depreciation for each year of the asset's life. The calculation divides the asset cost by the number of years in the estimated useful life to arrive at the amount of depreciation to be deducted each year.
( 1 / Remaining Useful Life ) X (Original Cost - Salvage Value - Acc. Depreciation)
This Annual depreciation amount is then divided by the number of periods available for that year to be depreciated.
This calculation is affected by the date placed in service\convention used when the asset is booked. For example, the depreciation for the first year of the asset's life will depend greatly upon the date it was placed in service which will help determine the convention to be used. (There are several conventions used for straight line depreciation listed in the Configuration guide for Fixed Assets.) The depreciation for the last period of the asset's life equals the remaining book value less the salvage value.
Assume that an asset is in service for the entire first year of it's useful life. The cost of the asset is $8250.00 and the salvage value is $1000.00. The useful life of the asset is five years. Annual depreciation for this asset would be calculated as follows:
$8250.00 - $1000.00 = $7250.00
[(cost) - (sal val) = (Depreciable Basis)]
(1/5 years) X ($7250.00) = $1450.00
[(1 / useful life) X Dep Basis = Annual Depreciation]
To calculate the period depreciation for straight line, you would simply divide the annual depreciation amount by the number of periods in the year.
$1450.00 / 12 = $120.83 (period depreciation)
If depreciation is assumed to be incurred in equal amounts in each business period over the life of the asset, the depreciation method used is straight line (SL). If the expense is assumed to be incurred in decreasing amounts in each business period over the life of the asset, the method used is said to be accelerated. Two commonly used methods of the accelerating the depreciation of an asset are the sum-of-years digits (SYD) and the declining balance (DB) methods. Frequently, accelerated depreciation is chosen for a business' tax expense but straight line is chosen for its financial reporting purposes.