Straight-Line Depreciation
Also known as annual depreciation · equipment write-down
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An asset costs something new and is worth something at the end. Straight-line depreciation spreads the difference evenly across its useful life: . A $30,000 van expected to fetch $5,000 after five years is written down $5,000 a year. Its simplicity is the whole appeal, and it remains the most common method in financial statements worldwide.
The virtue and the flaw are the same thing. Real assets do not lose value evenly: a new van drops a fifth of its worth the moment it leaves the lot, then declines gently for years. Straight line ignores that curve entirely, so the book value sits above the market value early in life and below it later. It is an accounting convention, not a valuation.
Read backwards it answers a useful shop question. Given what a machine cost, what it will fetch, and what you can afford to write off annually, the formula returns the life you are implicitly assuming.
- = Depreciation per year
- = Initial cost
- = Salvage value
- = Useful life in years
- Depreciation per year — Simple Payback Period, Loan Payment (Amortized Loan or Mortgage)
- Initial cost — Declining-Balance Depreciation (Book Value), Markup Percentage (on Cost)
- Salvage value — Loan Payment (Amortized Loan or Mortgage), Total Interest Paid Over a Loan
- Useful life in years — Declining-Balance Depreciation (Book Value), Loan Payment (Amortized Loan or Mortgage)