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Straight-Line Depreciation: Method, Formula & Example

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  • 0:00 Straight-Line Depreciation
  • 0:59 The Secret Formula
  • 1:37 Example
  • 2:47 Lesson Summary
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Lesson Transcript
Instructor: Toni Bonton

Toni has taught personal finance and is currently pursuing a doctorate in business administration.

Businesses must account for the annually decreasing value of fixed assets like furniture or equipment. This lesson explores the straight-line depreciation method and how it is used to decrease the value of a fixed asset over a specific span of time.

Straight-Line Depreciation

Jason owns a local car wash. Every ten years, Jason buys a new automatic car washing machine to ensure that his customers have access to quality equipment. At the end of the equipment's ten-year life period, Jason sells the equipment to a used parts store. The remaining value of a piece of equipment at the end of its useful life is called the residual value.

For tax purposes, Jason must account for the amount, or value, of the equipment that he uses each year. This decreases due to the passage of time and normal wear and tear, and is also called depreciation. Because Jason knows how long he plans to use the equipment, he can use the straight-line depreciation method. The straight-line depreciation method is an accounting method that equally divides the usable equipment value over the course of its usable life to determine the annual depreciation expense.

The Secret Formula

To calculate the annual depreciation value using the straight-line depreciation method, subtract the residual value from the cost of the fixed asset and divide that figure by the number of years the asset is to be used. A fixed asset is an asset that will be used for a long period of time.

The benefit of the straight-line depreciation method is that it reduces the value of a fixed asset the same way each year until the asset is no longer usable. This means that business owners will know the value of their equipment in advance and how much of the value is used each year. Don't worry if that doesn't make sense, here it is in action.

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