# Straight-line depreciation and when to use it

Straight-line depreciation is the simplest method of calculating depreciation for a fixed asset, such as computer hardware, equipment or a car. This lets you write off its value over time.

In this guide, you'll learn when to use straight-line depreciation, its pros and cons and how to calculate it.

**What is straight-line depreciation? **

Straight-line depreciation is one way to calculate depreciation. When an asset wears out or ages, it decreases in value. You can use straight-line depreciation to calculate how much of that loss of value you can claim.

It's the easiest of the four types of depreciation. That's because you use one formula to calculate the yearly amount, which stays the same every year. It's best used for assets you expect will decrease steadily in value over time.

**Straight-line depreciation formula **

The straight-line depreciation formula is:

**Depreciation expense = (Asset cost - salvage value) /estimated useful or effective life**

Your asset cost includes anything you spent on getting it ready for use, including shipping or assembly charges. The salvage value is the amount your asset will be worth when it's no longer useful to your business.

**How to calculate straight-line depreciation **

To calculate straight-line depreciation, you need to know the value of your asset and what it's likely to be worth once it no longer has value to your business. Follow these steps:

**Calculate the cost of the asset **

Calculate the cost of the asset by starting with the amount you paid for it, excluding any GST. Then, add any related costs associated with getting it set up.

**Subtract salvage value from asset cost **

Subtract the salvage value from the asset cost to get the depreciable expense. Most assets will have some salvage value, even if it's just what someone will pay for scrap metal or parts. Others, like tools or machinery, may no longer be good enough for your business but will still have good resale value for personal use.

**Calculate the asset's useful life **

Calculating the asset's useful life tells you how many years you expect it to work well for its intended business use. This is also called effective life.

In Australia, your asset's useful life is how long it’ll serve your business purposes. A high-end laptop may need to be replaced in two years by an IT consultant, but it could still hold value for personal use.

You can refer to the ATO's effective life of depreciating assets, but in most cases, you can estimate the asset's useful life – you're the one who knows what your business needs. Keep in mind, though, you may need to explain your reasoning to the ATO.

**Apply the straight-line depreciation formula **

Apply the straight-line depreciation formula asset value / useful life to calculate the annual depreciation.

**When should you use straight-line depreciation? **

You should use straight-line depreciation when you expect the asset to decrease in value steadily.

**Example of straight-line depreciation **

Here's an example of straight-line depreciation:

Say you buy a piece of machinery for $6000. This excludes GST but does cover shipping. You estimate the salvage value will be $2000, so the depreciation expense is now $4000.

If the machine’s useful life is two years, you can calculate its straight-line depreciation like this: $4000 ÷ 2 = $2000. This means you claim $2000 in depreciation each year for two years. That is, the machine’s value on your balance sheet decreases by $2000 each year until it reaches its salvage value of $2000 at the end of the two years.

**Advantages of straight-line depreciation **

The advantages of straight-line depreciation are primarily around its simplicity, making it a good option for small businesses:

**Easy to use **

It's easy to use. You calculate the annual claimable amount once based on what you paid, so you don't need to redo complicated calculations every year.

**Lower risk of errors **

Straight-line depreciation has a lower risk of errors because the formula is easy to follow. Once calculated, the amount stays the same every year.

**Consistent amount **

With the consistent amount you can claim yearly, there aren't any surprises or additional formulas to work out come tax time.

**Disadvantages of straight-line depreciation**

There are disadvantages of straight-line depreciation, especially for higher-value assets:

**Does not account for an asset's actual decline in value over time**

This method doesn’t account for an asset's actual decline in value over time, meaning it may lose value faster than you can claim. For example, something involving rapidly advancing technology, like computer equipment, may lose value rapidly in the first few years.

**Straight-line depreciation method uses guesswork **

The straight-line depreciation method uses guesswork, which can be especially tricky if this is your first time owning a business. It requires you to estimate the number of years the asset will be relevant for business use, as well as what you're likely to sell or salvage it for once it is "retired".

**Straight-line depreciation FAQs**

**What is the difference between declining balance and straight-line depreciation? **

The difference between declining balance (known as diminishing value depreciation in Australia) and straight-line depreciation is that diminishing value writes off a higher value in the first few years. Claimed amounts then get lower over time. Straight-line depreciation means you claim the same amount every year.

**What are the other methods of depreciation? **

Other methods of depreciation include double-declining depreciation and units of production depreciation. Double-declining depreciation decreases the value of an asset rapidly to start with. You claim twice that of the straight-line method, but you need to calculate this yearly based on the current (depreciated) value.

Units of production depreciation calculates depreciation based on the amount of work an asset does. For example, you may buy a chainsaw with a manufacturer's estimated lifespan of 10,000 working hours. Your chainsaw will then depreciate by a specific amount with every hour it's used.

**What is the simplest method of depreciation to use? **

The simplest method of depreciation to use is straight-line depreciation.

**Stop going around in circles – straight-line depreciation**

Straight-line depreciation is the simplest method of calculating the loss in value you can claim against your assets for your business.

Because the depreciation amount is the same each time, you don't need to keep recalculating it, leaving you free to get on with your business.

Straight-line depreciation may seem complicated, but it doesn't need to be. MYOB small business accounting solutions take the stress out of the numbers. Get started today.

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