How is straight-line depreciation calculated?

Straight-line depreciation is a method used to allocate the cost of an asset evenly over its useful life. The calculation formula for straight-line depreciation is based on the initial cost of the asset, its estimated salvage value (the value at which the asset can be sold at the end of its useful life), and the asset's useful life in years.

To calculate straight-line depreciation using the correct method, you subtract the salvage value from the initial cost of the asset and then divide the result by the useful life of the asset. This gives you a consistent annual depreciation expense, reflecting the notion that the asset contributes equally to generating revenue over its useful lifespan.

By using the formula (Cost - Salvage Value) / Useful life, one arrives at a clear and structured approach to financial reporting and asset management, allowing businesses to keep track of asset value accurately over time. In contrast, other methods that involve addition or simply dividing the cost of the asset or salvage value do not accurately reflect the intended distribution of the asset's cost.