Straight-line depreciation is the most common method used to calculate depreciation, and that amount is applied to an asset over its useful life. The steps involved in calculating it are:
- Determine the cost of the asset.
- Determine the salvage value of the asset.
- Determine the asset’s useful life in years.
- Divide 1 by the useful life to determine the depreciation rate.
- Multiply this rate by the the cost less the salvage value to get the annual depreciation.
For example, a machine is purchased for $30,000 and will work for five years. At the end of the five years, it can be sold for $8,000. The annual depreciation is:
Depreciation rate = 1 / 5 = 20%Annual depreciation = 20% x ($30,000 – $8,000) = $4,400