What is a 'Straight Line Basis'
A straight line basis is a method of computing depreciation and amortization by dividing the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used. Also known as straight line depreciation or straight line amortization, this is the simplest depreciation method.
BREAKING DOWN 'Straight Line Basis'
In the world of accounting, there are many different conventions that are meant to better match sales and expenses to the period in which they are incurred. One convention that companies embrace is referred to as depreciation or amortization. Companies use depreciation for physical assets, and they use amortization for intangible assets such as patents and software. Both are conventions that are used to expense an asset over a longer period of time, not just in the period that it was purchased. In other words, companies can stretch the cost of assets over many different periods, which allows them to benefit from the asset without deducting the full cost from net income. The challenge is determining how much to expense. One method accountants use to determine this amount is referred to as the straight line basis method.
Straight Line Method Variables
Accountants like the straight line method because it is easy to use, renders fewer errors over the life of the asset, and expenses the same amount every accounting period. Unlike more complex methodologies, such as double declining balance, straight line is simple and only uses three different variables to calculate the amount of depreciation each accounting period. The first data point or variable is the cost of the asset. The second data point is the salvage value of the asset, or the value of the asset at the end of its useful life. The third data point is the number of years the asset is expected to be useful.
Straight Line Example
For this example, assume Company A buys a piece of equipment for $10,500. The equipment has an expected life of 10 years and a salvage value of $500. To calculate straight line depreciation, the accountant must divide the difference between the salvage value and the cost of the equipment, also referred to as the depreciable base or asset cost, with the expected life of the equipment. The answer is $10,500 minus $500 divided by 10, or $1,000. This means that instead of writing off the full cost of the equipment in the current period, the company only has to expense $1,000. The company will continue to expense $1,000 to a contra account, referred to as accumulated depreciation, until $500 is left on the books as the value of the equipment.