Lessons · Accounting · straight-line depreciation
Straight-line depreciation
An asset that will last for years is expensed a little each year: cost minus salvage value, divided by useful life. The expense goes to depreciation expense and the other side to accumulated depreciation, which sits under the asset.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
A 12,000 van is bought in year one. Expense all of it that year and the business shows a loss it did not suffer; then it drives the van for free for four years. Spreading the cost is what makes each year's profit honest.
How to think about it
Write cost, salvage and life. Subtract salvage from cost, divide by life. That is the yearly charge. Book value at any date is cost less all the depreciation charged so far.
Worked example
Cost 12,000; salvage 2,000; life 5 yearsThe three numbers every straight-line calculation starts with.
Depreciation = (Cost − Salvage) / Life = (12,000 − 2,000) / 5 = 2,000 per yearThe same charge every year, which is what straight-line means.
Year-end: Dr Depreciation expense 2,000 / Cr Accumulated depreciation 2,000The expense for the year, and a running total kept beside the asset.
Book value after year 1 = 12,000 − 2,000 = 10,000Cost less accumulated depreciation. The van stays on the books at cost; the total charged so far sits under it.
Your turn
Cost 9,000, salvage 1,000, the yearly charge is 2,000. Write the line, with the life filled in.
Depreciation = (9,000 − 1,000) / = 2,000 per year
Solve one, graded on the server
The trap
Forgetting the salvage value and dividing the whole cost. On a 12,000 van with 2,000 salvage that overstates every year's charge by 400, and the van is written down to nothing while it still sells for 2,000.