The straight line method of depreciation is the simplest method of depreciation. Using this method, the cost of a tangible asset is expensed by equal amounts each period over its useful life. The idea is that the value of the assets declines at a constant rate over its useful life. This method is approved by GAAP.
To calculate straight line depreciation for an asset, you need the asset’s purchase price, salvage value, and useful life. The salvage value is the amount the asset is worth at the end of its useful life. Whereas the depreciable base is the purchase price minus the salvage value. Depreciation continues until the asset value declines to its salvage value.
First, calculate the depreciable base. Then divide the depreciable base by the useful life. You will find the depreciation expense used for each period until the value of the asset declines to its salvage value.
Depreciation Expense = Depreciable Base / Useful Life
For example, if a company purchased an asset for $100, then its salvage value is $0 and its useful life is 10 years. Then the annual depreciation expense for the asset would be $10 (10 = 100/10). Therefore, after 10 years, the asset will have depreciated to its salvage value – in this example $0. Thus, the depreciation for the asset will no longer occur.
The depreciation rate is the rate an asset is depreciated each period. To calculate the depreciation rate, divide the depreciation expense by the depreciable base. To find the depreciation expense using the deprecation rate, multiply the depreciable base by the depreciation rate.
Depreciation Rate = Depreciation Expense / Depreciable Base
Depreciation Expense = Depreciation Rate x Depreciable Base
In the above example, the depreciation rate would be 10% (10% = 10/100).