How is straight line depreciation calculated?

Straight-line depreciation is calculated by taking the initial cost of an asset, subtracting its salvage value, and then dividing that figure by the useful life of the asset. This method spreads the cost of the asset evenly across its useful life, allowing businesses to charge a consistent depreciation expense on their financial statements each period.

The correct approach involves determining the initial purchase price of the asset, estimating how much it can be sold for at the end of its useful life (salvage value), and then calculating the total depreciable amount (initial cost minus salvage value). This figure is then divided by the number of years the asset is expected to be in use, resulting in an annual depreciation expense. This method is favored for its simplicity and ease of understanding, making it a common choice for financial reporting.

In contrast, the other methods do not appropriately represent the straight-line method. Averaging costs over the useful lifespan could incorporate various calculations but does not define straight-line depreciation specifically. Applying a percentage to sales revenue applies to revenue-based depreciation methods, such as percentage of sales, rather than asset depreciation. Finally, adding annual profits to a fixed amount is not a recognized method for calculating depreciation, as it confuses profit calculation with asset value accounting.