Introduction
When it comes to the topic of calculating the depreciation value of an asset of a business in a competitive industry, there are numerous methods that are frequently used in order to conduct the calculation. Straight Line method is one such method.
The straight line method of depreciation is an especially helpful and effective method of calculating the depreciable value of any particular asset with regards to its acquiring cost and potential salvage value. Therefore, this is a crucial method that is often incorporated among firms worldwide.
Straight Line Method of Depreciation
The process of straight line depreciation involves the cost of acquisition of an asset as well as its potential future salvage value in years to come, as has been stated above. So, in order to expand on the topic of the depreciation method of Straight Line, these two aspects shall be understood first.
Since the straight line depreciation formula involves the cost of an asset, the asset that is being positioned in the market which can potentially yield a profit to its company will inevitably face a depreciation in its value in the market, with few rare exceptions. Therefore, the potential salvage value, i.e., the value of the asset in terms of its monetary value in the market in the future is utilized in this method to narrow down the depreciation value of the asset in the market with respect to the years of consideration.
Therefore, in order to further this discussion about this particular method of straight line depreciation, the formula that has been established in relation to this method has hereby been stated.
Straight Line Method of Depreciation Formula
As stated above, the straight line method is dependent entirely on an asset’s acquisition cost (the cost of the asset with which the asset has been purchased or sold in the market), and the salvage value which is the value at which the asset is presently or expectedly being sold or purchased in the market.
Therefore, the straight line method formula has been penned in accordance with the contributing factors of the method. The formula is hence derived by the difference between the salvage value of the asset in the market and the initial cost of acquisition of the asset. The resulted difference is the depreciation value of the asset.
The straight line depreciation equation is:
Depreciation Expense = \[\frac{\text{Cost of Fixed Asset - Salvage Value}}{\text{Useful Life }}\]
Straight Line Projection
Since a large part of the method of calculating the depreciating value of an asset in a market involves the projection of the annual depreciation formula of the asset’s value, it is imperative to understand the method of Straight line forecasting.
Straight Line projection or forecasting refers to the practice of gaining a thorough understanding of a business’ future potential revenue growth. The estimation that is required for this method is in alliance with the linear method of depreciation.
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FAQs on Straight Line Method
1. How does the Straight line Method of Depreciation differ from Declining Balance Depreciation?
Ans. Since the straight line method utilizes the original cost or the acquiring cost in order to determine the salvage value of any asset in a competitive market, the depreciation value of that asset is equal to the difference between the two. Whereas, the form of declining balance depreciation involves the rate at which the value of the asset gets depreciated with time in the market. Therefore, this form is effective in creating a greater gain for the asset when it has been sold in the market. So, this is how the method of straight line depreciation differs from the declining balance depreciation.
2. How does the Straight line basis of Depreciation differ from the Units of Production Depreciation?
Ans. The formula for the straight line method of asset value depreciation has been observed to have incorporated the difference between an asset’s salvage value and its original cost of acquisition in order to state the depreciation value of the asset with respect to any given time period. The Units of Production method also utilizes the salvage of an asset along with its acquiring cost. However, what distinguishes the two methods is that the latter is concerned with the number of units in the asset’s production and its historical price while a straight line is not concerned with the production of the asset or its number.
3. What is meant by the Daily Depreciation in Linear Depreciation?
Ans. While discussing the method of straight line depreciation of an asset, the aspect of daily depreciation comes up quite frequently. This is because daily depreciation is an exclusive method for the analysis of the daily depreciation in an asset’s value with respect to its first as well as its last year in its lifetime. Therefore, the prospect of daily depreciation enables businesses to determine short-term depreciation values of an asset in a market as opposed to long-term values or full periods. Therefore, the daily depreciation of an asset’s value in any given market is put into practice with the aid of the method of Straight Line.