STRAIGHT LINE Method of Depreciation in 3 Steps! - YouTube

Hey there welcome to Accounting Stuff I'm James and in this video you'll learn

how to calculate Straight Line Depreciation

in three easy steps Loads requests for this one

so let's jump right in Depreciation is the process of

reducing the book value of a tangible fixed asset due to use

wear and tear the passing of time or obsolescence

Straight-line depreciation is a fixed cost depreciation method

where the expense is spread out evenly over an asset’s useful life

What does that all mean?

Let me show you

Imagine that you're a farmer

I know a bit random but stay with me

You own a whole bunch of tangible fixed assets

these are the physical things that help you out on the farm

They are tangible meaning that you can touch them

and they're fixed so you intend to use them

for more than one year As time passes these

tangible fixed assets wear down and aren't worth as much as

they were when you bought them Take your combine harvester

let's assume that this one cost you four hundred and fifty thousand dollars

you expect to get twelve years of use out of it and after that

you'll probably sell it for scrap and get back around

ninety thousand dollars Let's depreciate it using the

straight-line method

Step 1

Write down what you know You know that this asset

is a combine harvester and that you're going to

depreciate it using the straight-line method

The asset cost is what you initially paid for it

four hundred and fifty thousand dollars a lot of money

You estimate that it's residual value or salvage value is

ninety thousand dollars and that it has a useful life of about twelve years

Step 2 Build a depreciation schedule

A depreciation schedule is a table and for straight-line depreciation

it has five columns

Year

Opening Book Value Depreciation Expense

Accumulated Depreciation and Closing Book Value

But what do all of these terms mean?

Year is the accounting period Opening Book Value is the

carrying amount of your combine harvester at the start of the year

this sits in your balance sheet Depreciation Expense is the value that

you write off as an expense to the income statement during the year

Accumulated Depreciation is the cumulative total of all

depreciation expenses incurred and Closing Book Value is the

carrying amount of your combine harvester at the end of the year

Step 3 Calculate the depreciation expense

accumulated depreciation and book values for each period

This is where things get real Yes we need to fill in all of the blanks

Let's begin with your Opening Book Value this one's easy

it’s your asset cost four hundred and fifty thousand dollars

Now let's work out your depreciation expense I mentioned at the start that

straight-line depreciation is a fixed cost depreciation method

where the expense is spread out evenly over the assets useful life

So grab your calculator we're about to do some maths

The depreciation expense can be calculated by taking your

straight-line depreciation rate and multiplying it by your depreciable cost

Your straight-line depreciation rate is 1 divided by the useful life of your

combine harvester so that's 1 over 12 years

which rounds to 8.33% Depreciable cost is the difference

between your asset cost and residual value $450,000 minus $90,000 is $360,000

This is the portion of the book value that we're depreciating

8.33% multiplied by 360,000 is $30,000 Your combine harvester’s

depreciation expense in year 1 Make sense?

If you need any help remembering the formula you can find it

on my depreciation cheat sheet which you can buy on my website

Link in the description Next we need to work out

your accumulated depreciation which is the sum of all

depreciation incurred to date In year one this is $30,000

exactly the same as your depreciation expense

Your closing book value is the carrying amount of your combine

harvester in your balance sheet at the end of the year

We can work it out by taking your opening book value and

subtracting your depreciation expense $450,000 minus $30,0000 is $420,000

Now with year one out of the way we just need to repeat the process

over and over again for the next eleven years Your closing book value in year one

becomes your opening book value in year two Your depreciation expense is fixed

because we're using the straight-line method so it's thirty thousand dollars

Accumulated depreciation is $60,000 and your closing book value is

$420,000 minus $30,000 which is $390,000

The process doesn't change So here's the completed

depreciation schedule You started off with a combine harvester

costing $450,000 you then wrote off $30,000 as a

depreciation expense to your income statement each year for the rest of your asset's useful life

You might notice that after twelve years

the closing book value of your combine harvester is $90,000

and this matches the residual value that we chose earlier

which is good because it means we haven't made any mistakes

which is always good sign Let's take another look at that graph

Here we're tracking your combine harvester’s book value over time

Your asset cost at the beginning is $450,000 and it’s residual value

at the end is $90,000 it’s depreciable cost is the difference

between the two $360,000

and it has a useful life of twelve years Straight-line depreciation is

a fixed cost method which means the expense is spread out evenly

over your asset’s useful life but there are other

variable depreciation methods as well where the expense is higher in early years

and these can be a bit more tricky I'll show you how they work in the next video

so if you'd like to catch that remember to click subscribe

And if you're interested in my depreciation cheat sheet

here it is it summarizes all of the key points

that I just went through See you in the next one!