Straight Line Basis Method - Definition

Back to: ACCOUNTING, TAX, & REPORTING

Straight Line Basis Method Definition

The simplest method of calculating an assets depreciation rate is called the Straight Line Basis method. Its computed by obtaining the difference between an assets cost and its eventual salvage value, divided by the number of years it stays functional and in use. This method is also known as the Straight Line Depreciation method to calculate amortization of intangible assets.

A Little More on What is Straight Line Basis Method

Various methods of computing are employed in the world of accounting to accurately match expenditures on assets with the correct time durations. Depreciation of physical assets like vehicles, manufacturing machinery, etc., , or amortization of intangible assets like intellectual property rights, software patents, etc., significantly impacts operational expenditures of a business, and the computation of these values accurately presents a clearer picture of profits and losses within a specific time duration. It also helps improving growth forecasts, assets funds allocation planning, and operational efficiency. The Straight Line Basis method is one of the many methods, and a handy tool to evaluate the dwindling values of assets. Its simple to calculate with only three different variables used in the formula, easy to apply in various scenarios, is more accurate than other methods, and maintains expenses uniformity across different accounting periods. The three data points are:

1. Cost of the asset.
2. Salvage value of the asset - eventual cost of the asset at the end of its life.
3. Number of years the asset is expected to be in use.

For e.g., a company X buys an asset worth \$1000. Its a piece of machinery that will stay in use for 5 years, after which it would fetch a price of \$200 on the market. Using these three data points, Straight Line Basis asset depreciation can be calculated by dividing the difference between the cost and salvage value of the asset with the number of years in use. (\$1000 - \$200)/5 years = \$160 Hence, the Straight Line Depreciation of this asset over the intervening 5 years is \$160 per year. So, accountants use this value - \$160, to write-off the expenditure on this asset every year, instead of expensing it as a one time expense of \$1000 in the current year. This is also known as Accumulated Depreciation and included in the books until \$200 is the remainder value of the asset in the books.