Straight-Line Depreciation: Formula and Example

The straight-line depreciation calculator estimates how much an asset’s depreciable cost is allocated to each full year of its useful life. Enter its purchase cost, expected salvage value, and useful life in years to get annual depreciation, the monthly equivalent, and the asset’s book value after one year.

Formula

Annual straight-line depreciation = (asset cost − salvage value) ÷ useful life. In symbols, D = (C − S) / L, where D is depreciation per year in dollars per year, C is the asset’s cost in dollars, S is its estimated salvage value in dollars, and L is its useful life in years. Salvage value is the estimated amount the owner expects to recover at the end of the asset’s useful life.

The calculator’s monthly equivalent is D / 12. Its book value after one full year is C − D, assuming depreciation begins at the start of the year and there are no additional adjustments, disposals, or impairment losses. Book value means the asset’s recorded cost less accumulated depreciation; it is not necessarily the amount the asset could sell for.

Worked Example

Using the calculator’s default inputs—cost $10,000, salvage value $1,000, and useful life 5 years:

1. Subtract salvage value from cost: $10,000 − $1,000 = $9,000 depreciable cost.
2. Divide by useful life: $9,000 ÷ 5 = $1,800 annual depreciation.
3. Divide the annual amount by 12: $1,800 ÷ 12 = $150 monthly equivalent.
4. Subtract one year’s depreciation from cost: $10,000 − $1,800 = $8,200 book value after one year.

The calculator therefore returns $1,800.00 per year, $150.00 per month, and $8,200.00 as the book value after one full year.

How Straight-Line Depreciation Works

Depreciation is an accounting method for allocating the cost of a tangible asset over the periods in which it is expected to be used. Rather than recording the entire cost as an expense in the year of purchase, a business typically recognizes part of the depreciable amount over time. Straight-line depreciation allocates an equal amount to each full period in the asset’s estimated useful life.

The total amount depreciated over the asset’s life is generally its cost minus its estimated salvage value. Under the assumptions in the example, five years of $1,800 depreciation total $9,000, leaving the asset with a book value of $1,000—the assumed salvage value. Depreciation does not, by itself, set aside cash or measure an asset’s changing market price.

When to Use This Method

Straight-line depreciation can be suitable when an asset is expected to provide benefits fairly evenly over time. It is commonly used for assets such as office furniture, buildings, and equipment, depending on the circumstances and the accounting rules that apply. The method’s simplicity also makes it easy to forecast recurring depreciation expense and compare periods.

Before calculating, determine which costs belong in the asset’s recorded cost, estimate a realistic useful life, and estimate salvage value. These are accounting judgments, not outputs of the formula. For a partial first year, organizations may apply a convention such as a monthly or daily allocation; the calculator above shows full-year depreciation and does not automatically account for purchase dates or partial periods.

Book Value, Expense, and Common Mistakes

Annual depreciation is the expense allocated for a year, while accumulated depreciation is the total allocated since the asset was placed in service. Book value is usually calculated as recorded cost minus accumulated depreciation. In the example, after two full years, accumulated depreciation is $3,600 and book value is $6,400, assuming no other accounting changes.

• Using the wrong salvage value: If salvage value is overlooked, the calculation allocates the entire cost, which may depreciate the asset below its expected residual amount.
• Confusing useful life with warranty or ownership period: Useful life is an estimate of the period the asset will be used to provide benefits; it is not necessarily the period it is owned or covered by a warranty.
• Mixing periods: The basic formula needs useful life in years for annual depreciation. If life is entered in months, use a monthly formula instead: (C − S) divided by useful life in months.
• Rounding too early: Keep precision during intermediate calculations, then round the reported amount to the appropriate currency precision. Small rounding differences can occur across periods.

Depreciation is a noncash accounting expense in the period it is recorded: the original purchase involves cash or another form of payment, but the annual depreciation entry does not itself represent a new payment. Nor does straight-line depreciation promise that an asset’s resale value will fall by the same amount each year.

Limits and Other Depreciation Methods

The formula assumes an equal allocation for each full year and depends on estimates of useful life and salvage value. It does not determine whether an item qualifies as a depreciable asset, what costs should be capitalized, when depreciation starts, or which reporting or tax rules apply. Those matters vary by purpose and jurisdiction, so a calculator’s result should not be treated as a determination of tax treatment or accounting compliance.

Other methods may better represent how an asset is consumed. Declining-balance methods recognize larger depreciation amounts earlier and smaller amounts later. Units-of-production methods base depreciation on actual use, such as machine hours or units produced. These methods require different inputs and assumptions; they should not be substituted merely because they produce a preferred expense pattern.

Frequently Asked Questions

What is the straight-line depreciation formula?
Subtract the estimated salvage value from the asset’s cost, then divide the result by its useful life. For annual depreciation: (cost − salvage value) ÷ useful life in years.

Can salvage value be zero?
Yes. If the estimated residual value is zero, annual depreciation is the asset’s cost divided by its useful life. Use a supportable estimate rather than assuming zero automatically.

How do I calculate monthly straight-line depreciation?
For a full-year calculation, divide annual depreciation by 12. Alternatively, subtract salvage value from cost and divide by the useful life in months. A partial first or final month may require a separate convention.

Can straight-line depreciation reduce book value below salvage value?
Not when the method is applied consistently over the stated useful life: total depreciation is limited to cost minus salvage value. Adjustments or revised estimates can affect the schedule under applicable accounting rules.

Is depreciation the same as an asset’s market-value loss?
No. Depreciation allocates recorded cost for accounting purposes. Market value is the amount an asset might sell for and can change differently, including rising or falling by amounts unrelated to depreciation.

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in cost | Asset cost | $ | 10000 | 0
in salvage | Salvage value | $ | 1000 | 0
in life | Useful life | years | 5 | 0
out annual | Annual depreciation | $/year | (cost - salvage) / life | 2
out monthly | Monthly equivalent | $/month | annual / 12 | 2
out book | Book value after one year | $ | cost - annual | 2