Understanding Straight-Line Basis for Depreciation and Amortization
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
Straight-line depreciation spreads an asset's cost minus its salvage value evenly over its useful life, so the business records the same expense in every full period.
Key takeaways
- The formula is (cost minus salvage value) divided by useful life, so a 5-year life means 20% a year.
- A $48,000 van with a $6,000 salvage value and a 7-year life depreciates $6,000 a year.
- Under the half-year convention, year one gets half a year's charge and the final half lands in an extra year.
- Declining balance and other accelerated methods record the same total depreciation and differ only in timing.
Straight-line depreciation spreads an asset’s cost evenly over its useful life, so the business records the same expense in every full period. For a physical asset it is called depreciation. For an intangible asset such as a patent or software license it is called amortization. The method assumes the asset delivers its benefit at a steady rate, which is why its book value, plotted over time, falls in a straight line.
How the straight-line method works
The calculation needs three inputs:
- Cost (basis): the purchase price plus costs needed to put the asset into service, such as delivery and installation.
- Salvage (residual) value: what the company expects to recover at the end of the asset’s life through resale, trade-in or scrap.
- Useful life: the number of years, or months, the company expects to use the asset.
Straight-line depreciation formula:
Annual depreciation = (Cost − Salvage value) ÷ Useful life
Cost minus salvage value is the depreciable base, the portion of the cost that will become expense. The straight-line rate is 1 ÷ useful life, applied to that base: a 5-year life is 20% a year, a 10-year life is 10%, and a 20-year life is 5%.
Book value at any point follows directly:
Net book value = Cost − Accumulated depreciation
Each year’s expense appears on the income statement. Accumulated depreciation sits on the balance sheet as a contra account that reduces the asset’s carrying amount.
Cost is a known figure, but salvage value and useful life are estimates. Companies typically base them on resale prices for comparable used equipment, manufacturer guidance, their history with similar assets and how intensively they plan to use the asset.
Worked example
Hypothetical: a business buys a delivery van for $48,000, expects to use it for 7 years and estimates a $6,000 resale value at the end.
($48,000 − $6,000) ÷ 7 = $6,000 per year
| Year | Depreciation expense | Accumulated depreciation | Year-end book value |
|---|---|---|---|
| 1 | $6,000 | $6,000 | $42,000 |
| 2 | $6,000 | $12,000 | $36,000 |
| 3 | $6,000 | $18,000 | $30,000 |
| 4 | $6,000 | $24,000 | $24,000 |
| 5 | $6,000 | $30,000 | $18,000 |
| 6 | $6,000 | $36,000 | $12,000 |
| 7 | $6,000 | $42,000 | $6,000 |
Depreciation stops when book value reaches the $6,000 salvage value. If the van is later sold for more or less than its book value, the difference is recorded as a gain or loss on disposal.
Straight-line depreciation with no residual value
When salvage value is zero, the formula simplifies to cost ÷ useful life, and the asset is depreciated to a book value of $0. With no salvage, the same van would be depreciated at $48,000 ÷ 7 ≈ $6,857 a year. Companies often assume zero residual value for assets they expect to run until they are worthless.
Monthly depreciation and partial years
Depreciation can also be calculated monthly: divide the annual figure by 12, or divide the depreciable base by the useful life in months. The van’s monthly charge is $6,000 ÷ 12 = $500. Assets bought partway through a year are commonly prorated. A van placed in service on October 1 would carry three months, or $1,500, of depreciation in its first fiscal year.
Straight line with the half-year convention
Some systems apply a convention instead of exact proration. Under the half-year convention, every asset is treated as placed in service at the midpoint of the year, so year one receives half a year’s charge regardless of the actual purchase date. For the van, that means $3,000 in year 1, $6,000 in years 2 through 7, and a final $3,000 in year 8. Total depreciation is still $42,000, spread across eight fiscal years. U.S. tax depreciation (MACRS) uses the half-year convention by default for most equipment and a mid-month convention for real estate.
Straight-line amortization
Amortization applies the same arithmetic to intangible assets with finite lives, such as patents, copyrights, licenses and capitalized software. Hypothetical: a $150,000 license with a 10-year term and no residual value is amortized at $15,000 a year. Under U.S. tax rules, most acquired intangibles covered by Section 197, including purchased goodwill, are amortized straight-line over 15 years. Under GAAP, goodwill is not amortized by public companies but tested for impairment instead.
Why companies use it
Expensing a large purchase all at once would depress profit in the year of purchase and overstate it later, while the asset is still producing revenue. Spreading the cost matches expense to the periods that benefit from the asset. The straight-line method does this with the fewest inputs, which makes it the default for many businesses in financial accounting. It suits assets that wear out evenly over time: buildings, office furniture, leasehold improvements and equipment used at a steady rate.
Depreciation is a non-cash expense. The cash leaves when the asset is bought, so analysts add depreciation and amortization back when computing EBITDA and operating cash flow.
Limitations
- Estimates drive the result. A useful life set too long understates expense and overstates book value. If technology makes the asset obsolete early, a large write-down or loss on disposal follows.
- Uniform decline is an assumption. Vehicles and computers often lose much more market value in their first years than later. Straight-line spreads that loss evenly instead.
- Rising upkeep is ignored. As maintenance costs climb on an aging asset, the total cost of using it rises while the depreciation charge stays flat.
When estimates change, past years are not restated. The remaining book value, less the revised salvage value, is spread over the revised remaining life. Hypothetical: after year 3 the van’s book value is $30,000. If management decides only 2 years of use remain, with the same $6,000 salvage, the new annual charge is ($30,000 − $6,000) ÷ 2 = $12,000.
Straight-line vs. other depreciation methods
Declining balance applies a fixed percentage to the asset’s remaining book value rather than a fixed amount to the original base, so the expense shrinks each year. Double-declining balance uses twice the straight-line rate. For the van, that rate is 2 ÷ 7 ≈ 28.57%, giving year-one depreciation of about $13,714 compared with $6,000 under straight-line. Plotted over time, book value under declining balance follows a downward curve rather than a straight line.
Units of production ties depreciation to actual use, such as miles driven or machine hours, so the expense varies with activity.
Sum-of-the-years’-digits is another accelerated method. It weights early years more heavily using a declining fraction.
All of these methods recognize the same total depreciation over the asset’s life. They differ only in timing, which changes reported profit year by year and when tax deductions are taken. A company can use straight-line in its financial statements and an accelerated method for tax, keeping separate records for each.
FAQs
Can you work out an asset's basis from its straight-line depreciation?
Yes, if you know the recovery period and the asset was in service for a full year. Multiply the annual depreciation by the number of years in the recovery period. For U.S. residential rental property, which is depreciated straight-line over 27.5 years, annual depreciation of $10,000 implies a depreciable basis of about $275,000. That figure covers the building only, because land is not depreciated, and the first and last years are smaller under the mid-month convention.
The Bottom Line
Business owners, bookkeepers and analysts benefit from understanding straight-line depreciation because it is the default method for many businesses. It works best for assets that wear out evenly, such as buildings, furniture and steadily used equipment. Its accuracy depends on realistic estimates of useful life and salvage value, and when those estimates change, the remaining book value is spread over the revised life without restating past years.
