Straight Line Depreciation

This is of the two most common and simplest methods of calculating depreciation of a fixed asset because the loss in value is evenly distributed over the useful life of the asset, starting in the month in which it was purchased.

For example, an item of machinery was purchased for £25,000 (and with zero residual value) and was predicted as having a life span (economic life) of 5 years, this would mean it would depreciate in value over 5 years at a rate of 20% per year, but not necessarily for the first and final year. If the item of machinery was bought halfway through the first accounting year (so this is really just one-half a year depreciation, then the depreciating value would be £5,000 x 0.5 = £2,500 but let us assume that is not the case for this example.

To calculate the annual straight-line depreciation costs, use the formula:

Acquisition value (less estimated residual value) / useful life = depreciation value per year. Thus, £25,000 / 5 = £5,000 per year.

The profits would have an annual charge of £5,000 applied against them (because this is the estimated amount of economic benefit consumed), while the balance sheet value of the machine would be reduced by the same amount each year, so that at the end of year 5, the value would be nil. See also Depreciation.