Definition of Straight-Line Depreciation
Straight-line depreciation is the most common method of allocating the cost of a plant asset to expense in the accounting periods during which the asset is used. With the straight-line method of depreciation, each full accounting year will report the same amount of depreciation. The total amount of depreciation over the years of the asset’s useful life will be the asset’s cost minus any expected or assumed salvage value.
In the U.S., a regular corporation may use the straight-line method of depreciation for its financial statements while at the same time be using one of the Internal Revenue Service’s faster depreciation methods on its federal income tax return.
Example of Straight-Line Depreciation
To illustrate straight-line depreciation, assume that a service business purchases equipment on the first day of an accounting year at a cost of $430,000. Further, the equipment is expected to be used in the business for 10 years. At the end of the 10 years, the company expects to receive the salvage value of $30,000. In this example, the straight-line depreciation method results in each full accounting year reporting depreciation expense of $40,000 ($400,000 of depreciable cost divided by 10 years). If the asset is purchased in the middle of the accounting year, there will be $20,000 of depreciation expense in the first and the eleventh accounting years and $40,000 in each of the accounting years 2 through 10.
