Straight Line Basis

Straight-line basis

The straight-line basis is a simple method for allocating an asset’s cost as an expense over its useful life. It assumes the asset loses value evenly each accounting period, producing a constant depreciation or amortization charge.

How it works

• Determine the asset’s purchase price (cost).
• Estimate the salvage (residual) value at the end of its useful life.
• Estimate the asset’s useful life in years.
• Subtract salvage value from cost, then divide by the useful life to get the annual expense.

Formula:
Straight-line depreciation = (Purchase price − Salvage value) / Useful life (years)

The same approach applies to amortization of intangible assets (patents, software, etc.).

Example

Company A buys equipment for $10,500, expects 10 years of use, and a $500 salvage value.

Calculation:
($10,500 − $500) ÷ 10 = $1,000 per year

Each year the company records $1,000 of depreciation until accumulated depreciation reduces book value to the $500 salvage value.

Pros

• Simple to calculate and apply.
• Produces consistent, predictable expense recognition each period.
• Fewer computational errors compared with more complex methods.

Cons and limitations

• Relies on estimates for salvage value and useful life, which can be uncertain.
• Does not reflect accelerated wear or higher early-period usage.
• May understate expense when assets lose value faster early on (or due to technological obsolescence).
• Ignores increasing maintenance costs over time.

When to use straight-line

• When an asset’s economic benefit is consumed evenly over time.
• For financial reporting where simplicity and comparability are priorities.
• For many intangible assets where consumption is predictable.

If an asset loses value more rapidly early in its life, alternative methods (for example, declining-balance) may better match expense to actual value consumption.

Straight-line amortization

Applied to intangible assets, straight-line amortization spreads the cost of an intangible evenly across its useful life using the same formula and assumptions as depreciation.

Bottom line

The straight-line basis is a widely used, easy-to-apply method for depreciation and amortization that yields equal periodic expense amounts. It works well when value declines steadily, but consider alternative methods when decline is accelerated or uneven.