Business Glossary

method providing equal depreciation charges for each period because it assumes constant benefit from the asset. It is the easiest and most popular method of computing depreciation expense. Straight-line depreciation expense equals cost less salvage value divided by life. Assume an auto having a five-year life was acquired for $13,000, with salvage value of $1000. Depreciation expense per year is $2400 [($13,000 - $1000)/5].

method of depreciating a fixed asset whereby the asset's useful life is divided into the total cost less the estimated salvage value. The procedure is used to arrive at a uniform annual depreciation expense to be charged against income before figuring income taxes. Thus, if a new machine purchased for $1,200 was estimated to have a useful life of ten years and a salvage value of $200, annual depreciation under the straight-line method would be $100, charged at $100 a year. This is the oldest and simplest method of depreciation and is used by many companies for financial reporting purposes, although faster depreciation of some assets with greater tax benefits in the early years is allowed under the Modified Accelerated Cost Recovery System (MACRS) .

equal annual reductions in the book value of property. It is used in accounting for replacement and tax purposes.

Example: A property has a depreciable basis of $275,000. For tax purposes, a useful life of 27½ years is used with no salvage value . Using straight-line depreciation, the book value of the property is decreased by $10,000 ($275,000/27.5) per year. The tax deduction for depreciation is $10,000 per year.