How does straight-line depreciation work?

Definition

Straight-line depreciation assigns the same dollar amount to each period of an asset's life. On the books, that even amount is the depreciation expense for the period, with a matching increase in accumulated depreciation.

You take cost, subtract any salvage you expect at the end, and divide by the number of periods. The result repeats until the asset is fully charged off or sold.

Where it shows up

Balance Sheet: Related to accumulated depreciation, which grows by the same amount each period.

P&L: Related to depreciation expense, which is the same amount each period.

See also: Depreciation Expense · Depreciation Method · Depreciation Schedule

When you look at your Balance Sheet, this pattern does not appear as its own line. What you see is accumulated depreciation rising by the same dollars each period.

The profit and loss statement shows the matching depreciation expense. Under this pattern that expense is flat from period to period, aside from a partial first or last period.

A steady charge is easier to plan around than a charge that jumps. A large even amount can still weigh on profit if the assets were expensive.

This entry is non-cash. Recording the even amount does not lower the bank balance.

The supporting schedule is where the repeating figure lives. Each asset's cost, life, and salvage sit there so the books can pick up the same amount again.

How it works

Start with the asset's capitalized cost. Subtract salvage only if you truly expect to sell the item for something at the end of its life; many small books use zero.

Divide what remains by the useful life, counted in years or months. That quotient is the charge for a full period.

You debit depreciation expense and credit accumulated depreciation for that same figure. You do not change the original cost account as you go.

A mid-year placed-in-service date can make the first period a stub. After that, full periods take the full even amount until the last stub or until disposal.

Stop when accumulated depreciation has taken all of the depreciable cost, or when the asset is sold or retired. Do not keep charging an item that is already at salvage or gone.

Stay on this even pattern. Other methods exist, but this page is the repeating amount, not a menu of shapes.

The method you chose for the asset should stay in place. Switching mid-life makes the schedule and the P&L harder to follow.

Example

A daycare buys a van for $12,000. It expects to use the van for 6 years and to recover nothing at the end.

Depreciable cost is $12,000. Each year takes $2,000.

One year's entry is:

Debit: Depreciation expense $2,000

Credit: Accumulated depreciation $2,000

Depreciation expense on the P&L is $2,000, and accumulated depreciation on the Balance Sheet rises by $2,000. Cash has not moved.

The van still sits at $12,000 of original cost. After this year, net book value is $10,000, and next year takes another $2,000.

Common mix-ups

Straight-line is not the expense account. It is the pattern that sets the amount; depreciation expense is the P&L line that receives that amount.

Straight-line is not a cash sinking fund. You are not setting cash aside; you are only spreading cost already (or soon) paid.

A declining-balance or units-of-production pattern would not charge the same amount each period; those are different methods, not a correction to this one.

Related terms

• Depreciation Expense: The periodic charge that spreads a fixed asset's cost over its useful life.
• Depreciation Method: The chosen pattern for allocating an asset's cost to expense.
• Depreciation Schedule: The supporting schedule listing each asset, its cost, life, and depreciation to date.
• Accumulated Depreciation: The contra-asset account holding all depreciation taken on assets to date.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Useful Life: The number of periods a fixed asset is expected to serve the business.
• Capitalization Policy: The written dollar threshold and rules for recording a purchase as an asset instead of an expense.
• Net Book Value: An asset's original cost minus the depreciation recorded against it.