Straight-Line Method

The straight-line method reduces the value of an asset in equal increments over time.
This method is very easy to understand and use but is not commonly applied to high-
value items like cars or homes.

The first step in calculation is to make an estimate of the useable (expected) life of the
asset. For example, a lawnmower may have an expected life of 10 years, while a
kitchen appliance may have an expected life of five years.

In the formula for straight-line depreciation,

D = Depreciation
OV = Original Value
RV = Residual Value
EL = Expected Life

D = (OV – RV)
EL

Let’s plug in some numbers.

The lawnmower was purchased for $1,000; the expected useful life is 10 years, while
the residual value (after its useful life) is $200.

D = ($1,000 - $200)
10

Depreciation would be $800 divided by 10, or $80 per annum.