Straight Line Basis Method - Definition
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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:
- Cost of the asset.
- Salvage value of the asset - eventual cost of the asset at the end of its life.
- 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.
References for Straight Line Basis
Academic Research on Straight Line Basis
The return to straight-line depreciation: An analysis of a change in accounting method, Archibald, T. R. (1967). The return to straight-line depreciation: An analysis of a change in accounting method. Journal of accounting Research, 164-180. This paper takes a look at different accounting methods used to calculate the value of assets depreciation and makes the case for a return to the Straight Line Basis method. Discussion of the return to straight-line depreciation: an analysis of a change in accounting method, Sprouse, R. T. (1967). Discussion of the return to straight-line depreciation: an analysis of a change in accounting method. Journal of Accounting Research, 184-186. This paper discusses the implications of the return to Straight Line Depreciation method in accounting. A Note on" The Return to Straight-Line Depreciation", Bird, F. A. (1969). A Note on" The Return to Straight-Line Depreciation". Journal of accounting research, 328-331. This article provides the authors perspective on the return to the Straight Line Depreciation method. The straight-line depreciation is wanted, dead or alive, Ben-Shahar, D., Margalioth, Y., & Sulganik, E. (2009). The straight-line depreciation is wanted, dead or alive. Journal of Real Estate Research, 31(3), 351-370. This paper examines the various factors that influence the usage of straight-line depreciation methods and their implications in accounting. A Possible Economic Rationale for StraightLine Depreciation, Green, C. D., Grinyer, J. R., & Michaelson, R. (2002). A Possible Economic Rationale for StraightLine Depreciation. Abacus, 38(1), 91-120. This paper proposes and explains the economic rationale behind the usage of straight-line depreciation calculations. Changing from declining balance to straight-line depreciation, Greene, E. D. (1963). Changing from declining balance to straight-line depreciation. The Accounting Review, 38(2), 355. This paper compares the differences between straight-line depreciation methods and declining balance systems and the change from the latter to the former. Accelerated Straight Line Depreciation, Holzman, R. S. (1961). Accelerated Straight Line Depreciation. Taxes, 39, 314. This paper explains accelerated straight-line depreciation and the regulations that govern its computation and impact. REINVESTMENT CYCLES AND DEPRECIATION RESERVES UNDER STRAIGHTLINE DEPRECIATION, Schiff, E. (1957). REINVESTMENT CYCLES AND DEPRECIATION RESERVES UNDER STRAIGHTLINE DEPRECIATION. Metroeconomica, 9(1), 23-41. This paper takes a look at the influence of straight-line depreciation of assets on reinvestment cycles and depreciation reserves. Straight-line depreciation at average rate may be inaccurate in growing corporations, Stanley, W. F. (1949). Straight-line depreciation at average rate may be inaccurate in growing corporations. Journal of Accountancy (pre-1986), 87(000006), 478. This paper takes a critical look at the calculation of straight-line depreciation methods and their inaccuracy in emerging corporate structures. Straight-line depreciation--When life or basis changes, Paul, H. M. (1973). Straight-line depreciation--When life or basis changes. The CPA Journal (pre-1986), 43(000011), 996. This paper discusses the implication of changes in the variables used in calculating depreciation in the Straight Line Basis method, with focus on change in usage of the asset and its life expectancy.