Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Straight Line Basis

What it is:

Straight line basis refers to a method of calculating the depreciation of an asset

How it works (Example):

Straight Line Basis calculates depreciation which is an accounting measure of the "loss" of value of an asset over time.  In other words, depreciation represents the value an asset losses each time it is used.  Depreciation is measured over a period of time -- called the "useful life of the asset."   Each asset has an established useful life. For example, a building may depreciate over a 30-year period, whereas a piece of capital equipment may depreciate over 10 years. 

The amount of the depreciation during any period of the asset's useful life may be taken as an "expense" on a company's or individual's profit and loss statement.

The simplest method of calculating depreciation is to take the net asset value and divide it by the number of periods (usually years) of useful life.  This method is known as straight line basis.  For example, a piece of equipment with a useful life of 8 years may cost $14,000.  At the end of 8 years, the asset has a salvage value of $2,000.  The amount of depreciation taken during each year of its useful life, on a straight line basis, is $1,500.

Asset Cost – Salvage Value / Useful Life (years) = Straight Line Basis Depreciation

or

$14,000 - $2,000 / 8 = $1,500

Straight line basis depreciation does not take into account the rapid or accelerated loss of an asset’s value in the short term, which is especially noteworthy for assets like vehicles.

Why it Matters:

There are five methods of calculating depreciation based on Generally Accepted Accounting Principles (GAAP) guidelines. Use of each of these methods depends on the current tax laws as applied to particular assets.   While depreciation may not add revenues to a business, it does add an important accounting expense, allowing capital asset-intensive companies to improve their balance sheets substantially.