Straight Line Depreciation

Straight line depreciation refers to a decrease of an item’s book value by a fixed amount each time interval.

The Equation

Total depreciation =cost\hspace{0.1cm}price-book\hspace{0.1cm}value

Rate of depreciation =\dfrac {total\hspace{0.1cm}depreciation}{number\hspace{0.1cm}of\hspace{0.1cm}years}

Example 1

Cass purchased a $22,000 car four years ago. It has a current market value of $18,000. Assuming that Cass uses straight line depreciation, what is the rate that the car will depreciate by each year?

First, calculate how much the car has depreciated by now.

Total depreciation =cost\hspace{0.1cm}price-book\hspace{0.1cm}value
Total depreciation =22,000-18,000
Total depreciation =4,000

We are told the car is four years old so divide the total depreciation by 4.

Rate of depreciation =\dfrac {total\hspace{0.1cm}depreciation}{number\hspace{0.1cm}of\hspace{0.1cm}years}
Rate of depreciation \frac {4,000}{4}
Rate of depreciation =1,000

The annual depreciation rate is $1,000 per year.

Remember

  • Straight line depreciation can also be called flat rate or prime cost depreciation so look out for each of these terms in the question.
  • When an item’s book value equals zero, it will be written off.
  • Scrap value refers to the book value of the item when it will no longer be used.

See also

Simple Interest
Effective Interest Rate
Reducing Balance Depreciation
Unit Cost Depreciation