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Straight Line Depreciation

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Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

[MUSIC PLAYING] Hey, everyone. Welcome to our video today on straight line depreciation. So what's today's video all about? Well, today is going to be all about straight line depreciation. We're going to talk about the calculation for straight line depreciation, so depreciating our assets.

And then we're going to look at a few examples at the end of our video today of some different scenarios of calculating straight line depreciation. And let's start with that first bullet point. Let's start with just a general discussion of what straight line depreciation is.

OK, so when should straight line depreciation be used? Well, straight line depreciation should be used if there's consistent usage of the asset over the asset's useful life, so if there are no large fluctuations, increases or decreases, in terms of the usage level of that asset over time. One example can be buildings. So buildings aren't necessarily used more in the early years and less in the later years. Generally speaking, they're used consistently over their useful life.

So what are the benefits of straight line depreciation? Well, a big benefit of straight line depreciation is simplicity. So the asset is depreciated in equal dollar amounts over the useful life of the asset. So it's going to be the same depreciation amount every year, so it really simplifies that depreciation calculation that needs to be performed.

So the calculation for a straight line depreciation, what does that look like? Well, the numerator, when you're calculating straight line depreciation, is cost minus residual value. And the denominator is the number of years of the useful life. So cost minus residual value divided by the total years of the useful life, so the asset's useful life.

So now, let's break down this calculation a little bit more. Let's talk about the elements within the calculation. So if we start with cost, cost is the cost to purchase, acquire, or build the asset.

And now residual value. What's residual value? That's the estimated value of an asset at the end of its useful life. So it's the estimated value of an asset at the end of its useful life. So any value that's left over, once we've reached the end of that useful life of the asset, so if we can sell it, we can sell that used asset for a sum of money, whatever we estimate that value to be.

And now, when we're doing straight line depreciation, we can also break it down into a monthly calculation. So we can divide our straight line depreciation amount that we calculated by 12. So when we look at our straight line depreciation calculation, that's an annual amount.

That's our annual straight line depreciation. So if we divide that number by 12, that'll give us the monthly depreciation. And if we're looking for the amount of accumulated depreciation as of a certain month, we would just multiply that monthly amount by the number of months that we're looking for.

So now, let's take a look at our straight line depreciation formula, by performing some calculations with some example scenarios. OK, so let's look at our first example of calculating straight line depreciation. We're going to need some information. We're going to need to know the total cost, residual value, as well as the asset's useful life. And then you'll see here we have our straight line depreciation formula, so cost minus residual value divided by the number of years of the useful life.

So let's start with this example. Total cost of the asset of 500,000, we're going to assume it has a residual value of 15,000 and a useful life of 10 years. So now we can plug this information into our formula, cost minus residual value and our useful life, which will give us a straight line depreciation of 48,500.

Now, let's look at a second example of calculating straight line depreciation. So again, we're going to need that same information, total cost, residual value, useful life. And then you'll see here we have our straight line depreciation formula.

So let's go through this example. We're going to assume we have a total cost of a million, a residual value of 50,000, and a useful life of 15 years. So now we can plug that information into our straight line depreciation formula, cost minus residual value and then the number of years of the useful life, to give us our straight line depreciation or our annual depreciation.

And now, we can break that down even further by looking at the monthly depreciation. So every month, depreciation would be $5,278 in this case. So if we wanted to see what the accumulated depreciation would be at a certain point in time, we can take that monthly depreciation amount and multiply it by the number of months that we want to find. So for this example, we did, after 36 months, the total accumulated depreciation would be 190,000, which is this monthly depreciation multiplied by 36.

Great. So now that we've gone through some calculations of straight line depreciation, we looked at the monthly calculation as well, let's summarize what we talked about today, in a nutshell. Well today, we talked about straight line depreciation. And the formula for straight line depreciation is cost minus residual value divided by the number of years of useful life.

And then we looked at some examples. So we finished up today by looking at some examples of performing that calculation. I hope everybody enjoyed this video. And I hope to see you next time.