Straight Line Depreciation: Formula, Schedule and Example

Straight line depreciation spreads the cost of a fixed asset evenly across its useful life: annual depreciation = (cost − salvage value) ÷ useful life in years. A machine bought for € 120,000 with an expected salvage value of € 15,000 and a useful life of seven years therefore carries a charge of € 15,000 a year, or € 1,250 a month.

For a controller that figure matters well beyond the ledger. Depreciation is the largest cost nobody pays: it lowers profit without any cash leaving the company, it sets the carrying amount a lender uses to test covenants, and it is the one number in the financial statements that rests entirely on an estimate of your own. Stretch the useful life by two years and you report too much profit for a decade, then meet an unbudgeted loss on disposal the moment the asset is replaced.

What depreciation is

Depreciation allocates the cost of an asset to the periods that benefit from using it. You pay for a machine once, but it produces for seven years, so the cost belongs in those seven years rather than in the month of the invoice. Three inputs drive the outcome:

• Cost: the purchase price plus every outlay needed to bring the asset into use — freight, installation, commissioning and non-recoverable taxes.
• Salvage value, also called residual value: what you expect to recover at the end of the useful life, net of removal or selling costs.
• Useful life: the period over which the asset is economically useful to you. Economic, not technical: a truck that still runs after eight years but no longer meets emission rules is finished sooner.

Land is never depreciated, because using it does not consume its value. The same mechanics applied to intangible assets are called amortization.

The straight line depreciation formula

You can run the calculation per year, per month or per unit produced. The mechanics stay the same; only the denominator changes.

Annual depreciation = (cost − salvage value) ÷ useful life in years

Depreciation rate = annual depreciation ÷ cost × 100

1. Establish the cost, including every expenditure up to the point the asset is ready for use. Repairs and maintenance stay out of it; they are an expense of the period.
2. Estimate the salvage value. If you expect nothing of substance, set it to zero — never build in a residual you cannot support with a market price or a contract.
3. Set the useful life and document the reasoning in your accounting policies.
4. Divide the depreciable amount by the useful life, then by twelve for the monthly charge. Start in the month the asset is placed in service, not the month of the invoice.
5. Revisit the estimate when usage changes. You adjust the remaining years using the current carrying amount as the new starting point; you do not restate the past.

Straight line depreciation example: a full schedule

A manufacturer buys a machine in January for € 120,000, expects to use it for seven years and to sell it afterwards for € 15,000. The depreciable amount is € 105,000, the annual charge € 15,000, and the depreciation rate 12.5% of cost.

Year	Depreciation	Accumulated	Carrying amount
1	€ 15,000	€ 15,000	€ 105,000
2	€ 15,000	€ 30,000	€ 90,000
3	€ 15,000	€ 45,000	€ 75,000
4	€ 15,000	€ 60,000	€ 60,000
5	€ 15,000	€ 75,000	€ 45,000
6	€ 15,000	€ 90,000	€ 30,000
7	€ 15,000	€ 105,000	€ 15,000

The carrying amount ends at the € 15,000 salvage value, not at zero. That is the control on the schedule. Sell the machine in year seven for € 11,000 and the € 4,000 shortfall is a loss on disposal, reported separately in the profit and loss statement rather than as depreciation.

Straight line depreciation or declining balance?

Straight line depreciation charges an equal amount every year. Declining balance applies a fixed percentage to the carrying amount instead, so the charge is high early and tapers off: at 25% of carrying amount the example above would charge € 30,000 in year one, € 22,500 in year two and € 16,875 in year three.

• Straight line for assets that wear down and earn evenly: buildings, fixtures, installations. It is the default in financial reporting and what any reader of your statements expects.
• Declining balance for assets that earn most in their early years and lose market value quickly, or whose maintenance cost rises over time — the sum of depreciation and upkeep is then steadier across the life.
• Units of production for assets whose consumption is measurable and volatile. It ties in best with unit cost, but it requires metering per machine.

The method is an accounting policy, not an annual choice. Switch only when the pattern of use genuinely changes, and disclose it; otherwise no comparison between years holds up. Remember that book depreciation follows useful life while tax depreciation follows statutory rates and caps that differ per country. The gap between the two carrying amounts is a temporary difference and usually a deferred tax position, so keep two schedules, or one schedule with two columns, and never derive the tax charge from the book charge. How to document policies like these is covered in preparing financial statements.

Where depreciation shows up in your reports

One schedule feeds three places in your numbers, and those three have to reconcile:

• The profit and loss account, as an expense of the period. EBITDA excludes it by definition — that is exactly what separates EBITDA from operating profit.
• The balance sheet, as accumulated depreciation against cost. Cost minus accumulated depreciation is the carrying amount, and it must equal the closing line of your schedule.
• The cash flow statement, as an add-back to profit. It is added because it reduced profit without an outflow, not because it generates cash.

In Smartbooks that add-back is not something you build yourself: the Cash Flow tab in Financial Accounts follows the indirect method, deriving cash flow from historical results and balance sheet movements. For the forecast you plan fixed assets actively — investments and depreciation — and let cash be the balancing item, so every planned investment flows straight into the cash flow forecast. To see the entries behind a depreciation line, right-click the row in the report and choose Transactions; the filters on account and period are already applied.

Pitfalls

• Starting at the invoice date. Depreciation starts when the asset is placed in service. A machine sitting in the hall for three months before it runs costs nothing in those three months.
• Setting salvage value to zero for convenience. On vehicles and property that overstates the charge year after year, with a gain on disposal as the balancing figure — profit that comes from an estimation error rather than from operations.
• Capitalizing maintenance. Only outlays that genuinely extend capacity or useful life belong on the balance sheet. An overhaul that restores the original condition is an expense of the period.
• Letting the schedule drift from the ledger. A spreadsheet nobody reconciles will diverge from the carrying amount on the balance sheet within two years. Tie it to the general ledger account monthly, or quarterly at the very least.
• Keeping fully depreciated assets on the books. Items at zero carrying amount that left the building years ago inflate both cost and accumulated depreciation, and distort every ratio built on fixed assets.

Frequently asked questions

How do you calculate straight line depreciation?

Subtract the salvage value from the cost and divide the result by the useful life in years. At a cost of € 120,000, a salvage value of € 15,000 and a seven-year life, the charge is € 15,000 a year, or € 1,250 a month.

How do you calculate depreciation in the first year?

Pro rata, from the month the asset is placed in service. If it goes into use in April, you charge nine twelfths of the annual amount. The remainder shifts into the final year of the useful life, so the carrying amount lands exactly on the salvage value.

What is a typical useful life?

In practice: three to five years for IT equipment, five years for vehicles, five to ten years for machinery and installations, ten years for fixtures and thirty years or more for industrial buildings. These are conventions rather than rules; the support for your figure is your own pattern of use, and local tax caps may bind on top of it.

Can you expense an asset in one go?

Not if it has a multi-year benefit. Many companies do apply a threshold below which a purchase is expensed immediately; that is an accounting policy you document and apply consistently, not a statutory amount. Tax rules may set their own minimum period regardless.

A straight line depreciation schedule that rolls out of your reporting every month instead of out of a spreadsheet turns the calculation into a check rather than a chore. More formulas and benchmarks from this series are in the knowledge center.