# Understanding Straight-Line Basis for Depreciation and Amortization

![Straight Line Basis](https://www.investopedia.com/thmb/Lh8VXrmb4nuYNN0m0lvmJ0rGkTs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/StraightLineBasis-27e5ac7651b24572a05ef272c2475554.jpg)

*— Investopedia / Xiaojie Liu*

## What Is Straight Line Basis?

A straight-line basis is a straightforward method for calculating how an asset loses value over time through depreciation and amortization. By subtracting the salvage value from the purchase price and dividing by the asset’s useful life, businesses can determine an equal expense for each accounting period.

This method, represented graphically as a straight line, offers a clear way to account for the reduction in value, making it a popular choice among accountants for its simplicity and efficiency in financial reporting.  

### Key Takeaways

*   The straight-line basis is a simple method of calculating depreciation or amortization, where an asset's value decreases evenly over its useful life.
*   To calculate, subtract the salvage value from the purchase price and divide by the asset's useful life.
*   While easy to use and prone to fewer errors, this method may not account for accelerated depreciation or the impacts of technology.
*   Amortization using the straight-line method applies similarly to intangible assets, like patents, as it does with physical ones.

## How Straight Line Basis Simplifies Depreciation

In accounting, there are many different [conventions](https://www.investopedia.com/terms/a/accounting-convention.asp) that are designed to match sales and expenses to the period in which they are incurred. One convention that companies embrace is referred to as [depreciation and amortization](https://www.investopedia.com/ask/answers/06/amortizationvsdepreciation.asp). Accountants commonly use the straight-line basis method to determine this amount.

The straight-line method is one of the simplest ways to determine how much [value](https://www.investopedia.com/terms/v/value.asp) an asset loses over time. The challenge, though, is determining how much to expense. In this method, companies can expense an equal value of loss over each [accounting period](https://www.investopedia.com/terms/a/accountingperiod.asp). The assumption made by accountants is that the asset loses the same value over each period.

Companies use depreciation for [physical assets](https://www.investopedia.com/terms/p/physicalasset.asp), and amortization for [intangible assets](https://www.investopedia.com/terms/i/intangibleasset.asp) such as patents and software. Both conventions are used to expense an asset over its lifetime, which allows the company to reduce a large expense that would decrease its income and profitability if it were to expense the entire cost of the asset in the same year it purchased it.  

## Calculating Depreciation with the Straight Line Formula

Here's the formula to calculate straight-line depreciation.

> Straight Line Basis = (Purchase Price of Asset - Salvage Value) / Estimated Useful Life of Asset

To calculate the straight line basis, take the purchase price of an asset and then subtract the salvage value, its estimated value when it is no longer expected to be needed. Divide this number by the asset's expected useful life in years. In accounting terms, this is referred to as an asset's [useful life](https://www.investopedia.com/terms/u/usefullife.asp).  

> **Fast Fact**
>
> A declining balance method is an alternative, reducing asset value by a percentage, not a fixed amount.

## Pros and Cons of Using the Straight Line Basis Method

### Advantages

Accountants like the straight-line method because it is easy to use. Unlike complex methods like [double declining balance](https://www.investopedia.com/terms/d/double-declining-balance-depreciation-method.asp), it uses just three variables for each period's depreciation.

The straight-line basis is also an acceptable calculation method because it renders fewer errors over the life of the asset. As such, it expenses the same amount every [accounting period](https://www.investopedia.com/terms/a/accountingperiod.asp).  

### Disadvantages

Its simplicity is a major drawback. A significant pitfall is that useful life calculations are often guesswork. For example, there is always a risk that technological advancements could potentially render the asset obsolete earlier than expected.

 It also ignores an asset's accelerated early depreciation and rising maintenance costs.

Pros

*   Easy to use with three variables
    
*   Renders few errors
    
*   Expenses same amount for each accounting period
    

Cons

*   Calculation method may be too simple
    
*   Based on guesswork
    
*   Doesn't factor in accelerated loss of asset value
    

## Example of Straight Line Basis

Here's a hypothetical example to show how the straight-line basis works. Let's assume that Company A buys a piece of equipment for $10,500. The equipment has an expected life of 10 years and a [salvage value](https://www.investopedia.com/terms/s/salvagevalue.asp) of $500.

To calculate straight-line depreciation, the accountant divides the difference between the salvage value and the equipment cost—also referred to as the depreciable base or asset cost—by the expected life of the equipment.

Using the formula from above to calculate the asset's depreciation, the straight-line depreciation for this piece of equipment is:

> ($10,500 - $500) ÷ 10 = $1,000

When graphed, the result is a straight line.  

![Straight Line Basis](https://www.investopedia.com/thmb/oQA3F2pXmMWK7bKDNtNf1f6_XOs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/straightlinebasis-4806b29418db46b594f787de33a889a4.jpg)

**

The company can now expense $1,000 annually to account for the equipment's declining value. This $1,000 goes into [accumulated depreciation](https://www.investopedia.com/terms/a/accumulated-depreciation.asp) until $500 remains as the equipment's value.

## How Do You Calculate Straight-Line Depreciation?

To calculate depreciation using a straight-line basis, simply divide the net price (purchase price less the salvage price) by the number of useful years of life the asset has.

## When Should One Use Straight-Line Deprecation?

Straight-line depreciation is the easiest method for [calculating depreciation](https://www.investopedia.com/ask/answers/013015/what-best-method-calculating-depreciation-tax-reporting-purposes.asp). It is most useful when an asset's value decreases steadily over time at around the same rate.

## What Are Realistic Assumptions in the Straight-Line Method of Depreciation?

While the purchase price of an asset is known, one must make assumptions regarding the salvage value and useful life. These numbers can be arrived at in several ways, but getting them wrong could be costly. Also, a straight-line basis assumes that an asset's value declines at a steady and unchanging rate. This may not be true for all assets, in which case a different method should be used.

## What Is Straight Line Amortization?

Straight-line amortization works just like its depreciation counterpart, but instead of having the value of a physical asset decline, amortization deals with intangible assets such as intellectual property or financial assets.

## The Bottom Line

Calculating the depreciating value of an asset over time can be tedious. Many accountants use a simple, easy-to-use method called the straight-line basis. This method spreads out the depreciation equally over each accounting period.

To calculate using this method, first subtract the salvage value from the original purchase price. Then, divide that figure by the estimated useful life of the asset.

> **Article Sources**
>
> 1.  Cornell Law School—Legal Information Institute. "[Declining Balance Method](https://www.law.cornell.edu/cfr/text/26/1.167%28b%29-2)."