Learn: Depreciation - Straight Line Method

Welcome!Building on what you've already learned about business finance and key calculations, today we'll explore depreciation, focusing on the Straight Line Method. This concept is essential for understanding how businesses account for the loss in value of assets over time.

What is Depreciation?Depreciation is the process of allocating the cost of an asset over its useful life. It accounts for the reduction in the value of assets such as machinery, vehicles, or equipment due to wear and tear or obsolescence. This is important for financial planning and accurate profit calculation.

What is the Straight Line Method?The Straight Line Method is the simplest way to calculate depreciation. It assumes an asset loses value evenly over its useful life. This means the same amount is deducted annually, making calculations straightforward and predictable.

Formula for Straight Line DepreciationThe formula for calculating depreciation using the Straight Line Method is: Annual Depreciation = (Cost of Asset - Residual Value) ÷ Useful Life.- Cost of Asset: The price paid for the asset. - Residual Value: The estimated value of the asset at the end of its useful life. - Useful Life: The expected number of years the asset will be used.

Why is the Straight Line Method Important?The Straight Line Method is widely used because it is simple and provides consistent depreciation expense over time. This makes it easier for businesses to predict costs and prepare financial statements accurately.

Review Time!Great work! You've learned about depreciation, the Straight Line Method, its formula, and its importance. Let's test your understanding with a few review questions.

ConclusionWell done! You've successfully learned how to calculate depreciation using the Straight Line Method and understand its importance in business finance. Keep practising to master this concept further!