Straight-line depreciation spreads an asset's cost evenly over its useful life, so the expense is the same every year. The formula is (Cost − Residual value) ÷ Useful life. A $32,000 van with a $2,000 residual value and a 6-year life is depreciated at $5,000 a year.
It is the most widely used depreciation method and the first one most students learn. This guide covers the formula, the journal entry, partial years, changes in estimate, and how straight-line compares with the declining balance and units-of-production methods, with one example running throughout.
Why assets are depreciated
A delivery van helps a business earn revenue for several years. Expensing its whole cost in the year it is bought would make that year look terrible and the next five look better than they really were. Depreciation matches the cost of the van to the years that benefit from using it. Straight-line assumes the benefit is spread evenly, which is a reasonable assumption for most buildings, furniture and equipment.
The formula
Annual depreciation = (Cost − Residual value) ÷ Useful life
- Cost is the purchase price plus everything needed to get the asset ready for use: delivery, installation, testing and non-refundable taxes.
- Residual value (or salvage value) is what the business expects to sell the asset for at the end of its useful life.
- Useful life is how long the business expects to use the asset. That can be shorter than the asset's physical life; a company that replaces its laptops every three years uses a 3-year life, even if a laptop could last five.
Cost less residual value is the depreciable amount: the part of the cost the business will actually use up. Land is not depreciated, because it does not wear out.
Worked example: the delivery van
A company buys a delivery van for $32,000 on January 1, 2026. It expects to use the van for 6 years and then sell it for $2,000.
Annual depreciation = ($32,000 − $2,000) ÷ 6 = $5,000 a year
| Year | Depreciation | Accumulated depreciation | Carrying amount at year end |
|---|---|---|---|
| 2026 | 5,000 | 5,000 | 27,000 |
| 2027 | 5,000 | 10,000 | 22,000 |
| 2028 | 5,000 | 15,000 | 17,000 |
| 2029 | 5,000 | 20,000 | 12,000 |
| 2030 | 5,000 | 25,000 | 7,000 |
| 2031 | 5,000 | 30,000 | 2,000 |
The carrying amount (also called net book value) falls by the same amount each year and finishes at the $2,000 residual value, not at zero.
The journal entry
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | 5,000 | |
| Accumulated Depreciation, Van | 5,000 |
The credit goes to Accumulated Depreciation, not to the Van account. Accumulated depreciation is a contra-asset: it is shown on the balance sheet as a deduction from the van's cost, so readers can see both what the asset cost and how much of it has been used. At the end of 2028 the balance sheet shows Van $32,000, less accumulated depreciation $15,000, giving $17,000.
Partial years
Assets are rarely bought on January 1. When an asset is bought partway through the year, depreciate it only for the months it was owned.
If the van had been bought on July 1, 2026, the first year's depreciation would be $5,000 × 6/12 = $2,500. Each following full year is $5,000, and the final half-year in 2032 is the remaining $2,500.
Some companies use simpler conventions, such as a full year's depreciation in the year of purchase and none in the year of sale, or a half-year in each. Use whatever the question states. If it says nothing, depreciate by month.
When the estimates change
Useful lives and residual values are estimates, and estimates get revised. IAS 16 requires them to be reviewed at least at each year end. A change in estimate is applied prospectively: you do not go back and correct earlier years.
Suppose that at the start of 2029, with a carrying amount of $17,000, the company decides the van will last only 4 more years and sell for $1,000. New annual depreciation = ($17,000 − $1,000) ÷ 4 = $4,000 from 2029 onwards. The $15,000 already charged stays as it is. Restating earlier years would be treating an estimate change as an error, which it is not; see IAS 8 policies, estimates and errors.
Straight-line compared with other methods
Here is the same $32,000 van under the three most common methods. The declining balance version uses double the straight-line rate (2 ÷ 6 = 33.3% of the carrying amount each year). Units-of-production assumes the van will be driven 150,000 miles in total, which gives ($32,000 − $2,000) ÷ 150,000 = $0.20 per mile.
| Year | Straight-line | Double-declining balance | Units of production |
|---|---|---|---|
| 2026 | 5,000 | 10,667 | 6,000 (30,000 miles) |
| 2027 | 5,000 | 7,111 | 8,000 (40,000 miles) |
| 2028 | 5,000 | 4,741 | 5,000 (25,000 miles) |
Declining balance charges more in the early years, which suits assets that lose most of their value or usefulness quickly, such as vehicles and technology. Units-of-production ties the expense to actual use, so a quiet year has a low charge. Straight-line is the default when the benefit is spread evenly over time. Whichever you choose, it should reflect how the asset's benefits are actually used up, and it should be applied consistently.
Common mistakes
- Forgetting the residual value. $32,000 ÷ 6 = $5,333 is wrong if the van will sell for $2,000.
- Not prorating the first year. This is the most frequent depreciation error in exam answers.
- Crediting the asset account. The cost stays in the asset account; the depreciation builds up in accumulated depreciation.
- Depreciating below residual value. Once the carrying amount reaches the residual value, depreciation stops.
- Depreciating land. Land has an unlimited life. If land and a building are bought together, split the cost and depreciate only the building.
Practice depreciation
Depreciation turns up in journal entries, trial balances, balance sheets and cash flow statements, so it pays to make it automatic. Accountely's depreciation challenges check both your calculation and your journal entry, and the IAS 16 guide covers the wider rules for property, plant and equipment. It's free to start.
Frequently Asked Questions
What is the straight-line depreciation formula?
Annual depreciation equals cost minus residual value, divided by useful life in years. For an asset costing $32,000 with a residual value of $2,000 and a 6-year life, depreciation is $30,000 ÷ 6 = $5,000 a year.
How do I calculate straight-line depreciation for part of a year?
Calculate the full annual charge, then multiply by the number of months the asset was owned divided by 12. An asset bought on July 1 with $5,000 annual depreciation is charged $2,500 in its first year.
Why is straight-line depreciation used most often?
It is simple to calculate, easy to explain, and gives a reasonable result for assets whose benefits are spread evenly over time, such as buildings and furniture. It also produces a steady expense, which makes year-on-year results easier to compare.
Can the depreciation method be changed?
Yes, if a different method better reflects how the asset's benefits are used. Under IAS 8 this is a change in accounting estimate, so it is applied prospectively from the date of the change, without restating earlier years.