What is Straight Line Basis Calculation?
The straight line basis calculation is a method used in accounting to calculate the depreciation expense of an asset over its useful life. It is the most commonly used method for calculating depreciation and is based on the assumption that the asset will be used evenly over its useful life.
Under the straight line basis calculation, the depreciation expense is calculated by dividing the cost of the asset by its useful life. This results in an equal amount of depreciation expense being recognized each year. The formula for calculating the straight line depreciation expense is:
Where:
- Cost of Asset is the original cost of the asset.
- Salvage Value is the estimated value of the asset at the end of its useful life.
- Useful Life is the estimated number of years the asset will be used.
By using the straight line basis calculation, businesses can spread out the cost of an asset over its useful life, which helps to accurately reflect the wear and tear of the asset over time. This method is especially useful for assets that have a consistent usage pattern and do not experience significant changes in value over time.
How to Calculate Straight Line Basis?
Calculating straight line basis is a straightforward process that involves a few simple steps. Here is a step-by-step guide on how to calculate straight line basis:
Step 1: Determine the Initial Cost
The first step in calculating straight line basis is to determine the initial cost of the asset. This includes the purchase price of the asset, as well as any additional costs incurred to bring the asset into use, such as shipping or installation fees.
Step 2: Determine the Salvage Value
Next, you need to determine the salvage value of the asset. The salvage value is the estimated value of the asset at the end of its useful life. This value is subtracted from the initial cost to determine the depreciable cost.
Step 3: Determine the Useful Life
Step 4: Calculate the Annual Depreciation Expense
To calculate the annual depreciation expense, you divide the depreciable cost by the useful life of the asset. The formula for calculating straight line basis is:
| Straight Line Basis | = | Depreciable Cost | / | Useful Life |
|---|
For example, if the depreciable cost of an asset is $10,000 and its useful life is 5 years, the annual depreciation expense would be $2,000 ($10,000 / 5).
It is important to note that the straight line basis method assumes that the asset depreciates evenly over its useful life. This means that the same amount of depreciation expense is recognized each year.
By following these steps, you can easily calculate the straight line basis for any asset. This method provides a simple and consistent way to allocate the cost of an asset over its useful life.
Example of Straight Line Basis Calculation
Let’s consider an example to understand how straight line basis calculation works. Suppose a company purchases a machine for $10,000 with an estimated useful life of 5 years and no residual value.
Step 1: Determine the Cost
The cost of the machine is $10,000.
Step 2: Determine the Useful Life
The useful life of the machine is 5 years.
Step 3: Determine the Residual Value
Step 4: Calculate the Annual Depreciation Expense
To calculate the annual depreciation expense, we divide the cost of the machine by its useful life:
Annual Depreciation Expense = Cost / Useful Life
Annual Depreciation Expense = $10,000 / 5 years
Annual Depreciation Expense = $2,000
Step 5: Calculate the Accumulated Depreciation
To calculate the accumulated depreciation, we multiply the annual depreciation expense by the number of years the machine has been in use:
Accumulated Depreciation = Annual Depreciation Expense * Number of Years
Accumulated Depreciation = $2,000 * Number of Years
For example, if the machine has been in use for 3 years:
Accumulated Depreciation = $2,000 * 3 years
Accumulated Depreciation = $6,000
Step 6: Calculate the Book Value
The book value of the machine can be calculated by subtracting the accumulated depreciation from the cost:
Book Value = $4,000
After 3 years of use, the machine’s book value would be $4,000.
This example demonstrates how straight line basis calculation is used to allocate the cost of an asset over its useful life. By spreading the cost evenly over the years, the company can accurately reflect the decrease in value of the asset over time.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.