When running a business, you’ll need to calculate the depreciation of assets. The Internal Revenue Service (IRS) allows business owners to claim asset depreciation as a deduction. Assets, of course, will often lose some of their value over time. By tracking asset depreciation, you’ll save money on your business’s taxes. While there are different ways to calculate exactly how much value an asset has lost, one of the most common is straight-line depreciation.
Overview of Straight-Line Depreciation
Also known as straight-line basis, straight-line depreciation is a formula used to calculate asset depreciation. You can use it to calculate the depreciation of any fixed asset over a given period. From equipment and vehicles to patents and trademarks, straight-line depreciation works for all fixed assets.
How to Use Straight-Line Depreciation
How do you use straight-line depreciation exactly? First, you’ll need to identify the purchase price of the asset. This is the price that your business originally paid for the asset. Next, you’ll need to identify the scrap value of the asset. Scrap value refers to the monetary value of an asset at the end of its life. When assets have reached the end of their usable life, they may be scrapped for this value.
Finally, you’ll need to identify the usable life of the asset. Usable life is the duration for which an asset is expected to last. Some fixed assets last for just one or two years, whereas others last for over a decade. To use straight-line depreciation, you’ll need to identify the asset’s usable life along with its purchase price and scrap value.
Calculating Asset Depreciation With Straight-Line Depreciation
Assuming you know the asset’s usable life, purchase price and scrap value, you can calculate its depreciation with straight-line depreciation. Straight-line depreciation uses a simple formula. Just take the purchase price of the asset and subtract it by the scrap value. Next, divide this number by the asset’s usable life. The end result will be the asset’s annual depreciation.
Straight-line depreciation receives its namesake from its straight line. When presented in the form of a chart, asset depreciation will consist of a straight line. This is because straight-line depreciation assumes that all assets will depreciate at the same rate over a given period. There are other ways to calculate asset depreciation, but straight-line depreciation is arguably the easiest for this reason.
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