What is straight line depreciation?

Straight line depreciation is likely to be the most common method of matching a plant asset's cost to the accounting periods in which it is in service. Under the straight line method of depreciation, each full accounting year will be allocated the same amount or percentage of an asset's cost. (The total amount of depreciation over the years of the asset's useful life will be the asset's cost minus any expected or assumed salvage value.)

To illustrate straight line depreciation let's assume that a company purchases equipment at a cost of $430,000 and it is expected to be used in the business for 10 years. At the end of the 10 years, the company expects to receive a salvage value of $30,000. Under the straight line method each full accounting year will be allocated $40,000 of depreciation, which is one-tenth (1/10) or 10% of the $400,000 that needs to be depreciated over the useful life of the equipment. If the asset is purchased in the middle of the accounting year there will be $20,000 of depreciation in the first and the eleventh accounting year and $40,000 in each of the years 2 through 10.

In the U.S. a company may use the straight line method for its financial statements while at the same time be using the Internal Revenue Service's faster depreciation on its federal income tax return.

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