Depreciation is defined as the portion of a fixed asset’s cost that is charged to expense for a particular year or period. Except for land, all property and equipment are subject to depreciation. Depreciation is the decrease in the usefulness of the asset through use.

The straight-line method is one of the methods for calculating depreciation that results in equal distribution of charges over the useful life of the asset. The formula is: Depreciation = cost – scrap value / estimated useful life.

Cost is the price paid for the asset. Scrap value or salvage value is the estimated amount assigned to the asset or that may be received from the sale of the asset after its estimated life. The useful life is the estimated useful life of the asset.

Suppose the Bed Linens Company purchased machinery to manufacture its bedding for $10,000. Your accountant and management estimated that the machine tool is expected to have a bailing out value or salvage value of $1,000 at the end of its five-year life.

In this case, the total amount of depreciation to be taken on Bed Linens Company’s books over the useful life of the asset is only $9,000 or $1,800 for each year of useful life.

When salvage value is estimated and subtracted from the cost of a fixed asset, the result is called estimated net cost. Thus, if a car purchased for $40,000 is expected to have a useful life of six years and a salvage value of $4,000 at the end of its useful life, $40,000 is called the gross cost and $36,000 is called the gross cost. estimated net.

Writing off an equal fraction of the asset’s cost each year is called the straight-line depreciation method.

Using the straight line method, the percentage of the original cost written off each year, called the depreciation rate, is found by dividing 1 by the number of years. For example, if an asset is to be written off in five years, the depreciation rate is 20%.

Under the straight-line method, the amount of depreciation expense for a given year is determined by multiplying the estimated net cost by the depreciation rate. Therefore, if the estimated net cost is $9,000 and the depreciation rate is 10%, the annual amount of depreciation expense will be $900. It is recorded charging depreciation expense.. $900 and crediting accumulated depreciation-machine tool.. $900.

The factors that are relevant to the depreciation of an asset are:
(1) original cost;
(2) estimated salvage value; Y
(3) shelf life.

Under the straight-line method, equal amounts of depreciation expense are taken each year. The concept behind this method is that the availability of a fixed asset for service is the same from year to year during its life.

The date of the asset must be considered when determining depreciation expense. If the asset was acquired on July 1, 2009, the depreciation will be for half a year, that is, if the accounting year of the business ends on December 31.

Depreciation expense will be shown within operating expenses on the Income Statement, while accumulated depreciation will be shown on the Balance Sheet as a deduction from the respective asset.

There are other methods of contributing to depreciation besides the straight-line method. One of these methods takes into account the fact that many assets provide more service in their early years than in later years, due to declining mechanical efficiency, rising maintenance costs, and the increasing probability of obsolescence.