Straight Line Basis
What Is Straight Line Basis?
Straight line basis is a method of working out depreciation and amortization. Otherwise called straight line depreciation, it is the simplest method for working out the loss of value of a asset over the long run.
Straight line basis is calculated by splitting the difference between an asset's cost and its expected salvage value by the number of years it is expected to be utilized.
Seeing Straight Line Basis
In accounting, there are various conventions that are intended to match sales and expenses to the period in which they are incurred. One convention that companies embrace is alluded to as depreciation and amortization.
Companies use depreciation for physical assets, and amortization for intangible assets like licenses and software. The two conventions are utilized to expense an asset over a more extended period of time, not just in the period it was purchased. At the end of the day, companies can stretch the cost of assets throughout various time periods, which allows them to benefit from the asset without deducting the full cost from net income (NI).
Working out Straight Line Basis
The test is determining the amount to expense. One method accountants use to determine this amount is the straight line basis method.
To work out straight line basis, take the purchase price of an asset and afterward deduct the salvage value**,** its estimated sell-on value when it is not generally expected to be required. Then, at that point, partition the subsequent figure by the total number of years the asset is expected to be helpful, alluded to as the useful life in accounting jargon.
Straight Line Basis = (Purchase Price of Asset - Salvage Value)/Estimated Useful Life of Asset
Illustration of Straight Line Basis
Expect that Company A purchases a piece of equipment for $10,500. The equipment has an expected life of 10 years and a salvage value of $500. To compute straight line depreciation, the accountant splits the difference between the salvage value and the cost of the equipment — likewise alluded to as the depreciable base or asset cost — by the expected life of the equipment.
The straight line depreciation for this piece of equipment is ($10,500 - $500)/10 = $1,000. This means that as opposed to writing off the full cost of the equipment in the current period, the company just has to expense $1,000. The company will keep on expensing $1,000 to a contra account, alluded to as accumulated depreciation, until $500 is left on the books as the value of the equipment.
Benefits and Disadvantages of Straight Line Basis
Accountants like the straight line method since it is not difficult to utilize, renders less errors over the life of the asset, and expenses a similar amount each accounting period. In contrast to additional complex methodologies, for example, double declining balance, straight line is simple and uses just three distinct factors to work out the amount of depreciation each accounting period.
Notwithstanding, the simplicity of straight line basis is likewise perhaps of its greatest downside. One of the clearest entanglements of utilizing this method is that the helpful life calculation is based on mystery. For instance, there is generally a risk that innovative headways might actually deliver the asset obsolete sooner than expected. In addition, the straight line basis doesn't factor in the accelerated loss of an asset's value in the short-term, nor the probability that it will cost more to keep up with as it ages.
Features
- Straight line basis is a method of computing depreciation and amortization, the most common way of expensing an asset over a more extended period of time than when it was purchased.
- Straight line basis is well known in light of the fact that it is not difficult to compute and comprehend, in spite of the fact that it likewise has several disadvantages.
- It is calculated by splitting the difference between an asset's cost and its expected salvage value by the number of years it is expected to be utilized.
- Alternatives frequently include speeding up depreciation plans.
FAQ
When would it be advisable for one to utilize straight line censure?
Straight line is the most straightforward and least demanding method for ascertaining depreciation. It is most helpful when an asset's value diminishes consistently over the long run at around a similar rate.
How would you ascertain straight line depreciation?
To work out depreciation utilizing a straight line basis, basically partition net price (purchase price less the salvage price) by the number of valuable long periods of life the asset has.
What are reasonable presumptions in the straight-line method of depreciation?
While the purchase price of an asset is known, one must make suspicions with respect to the salvage value and helpful life. These numbers can be shown up at in more than one way, however getting them wrong could be costly. Likewise, a straight line basis expects that an asset's value declines at a consistent and constant rate. This may not be true for all assets, in which case an alternate method ought to be utilized.
What is straight line amortization?
Straight line amortization works just like its depreciation partner, yet rather than having the value of a physical asset decline, amortization manages elusive assets like intellectual property or financial assets.
