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Simple English definitions for legal terms
Straight-line depreciation
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A quick definition of Straight-line depreciation:
Straight-line depreciation is a way for businesses to deduct the cost of an asset over time instead of all at once. This means they can spread out the cost of something like a copy machine over its useful life, which is usually several years. To use straight-line depreciation, the business takes the difference between the cost of the asset and its expected salvage value (what it will be worth at the end of its useful life) and divides that by the number of years it will be used. This gives them the amount they can deduct each year. While this method is easy to use, it can be inaccurate because it's based on expectations and doesn't account for short-term losses or maintenance costs.
A more thorough explanation:
Straight-line depreciation is a method used by businesses to deduct the cost of an asset over its useful life. This means that instead of deducting the full cost of the asset at the time of purchase, the cost is spread out over the period of time that the asset is expected to be used.
For example, if a company buys a copy machine for $1000 and expects it to last for 10 years with a salvage value of $200, they can deduct $80 each year using the straight-line method. This is calculated by dividing the difference between the cost and salvage value ($800) by the number of years the asset is expected to be used (10).
Straight-line depreciation is a common method used by businesses because it is easy to calculate. However, it has some drawbacks. The useful life and salvage value are based on expectations, which can be inaccurate. Additionally, it does not factor in short-term losses or maintenance costs.
Other depreciation methods, such as the declining balance method, are available for businesses to use.