Straight Line Basis
Candlefocus EditorThe basis for the calculation of straight line basis is the cost of the assets minus its salvage value, divided by the time the asset is expected to be used for. For example, an asset with a purchase price of $1,000 and an expected salvage value of $200 after 5 years would be calculated as $800 divided by 5, or $160 per year. That is the annual depreciation or amortization expense.
The greatest advantage of straight line basis is that it is an easy calculation that is simple and straightforward to understand, implement, and maintain. This lends itself to an overall simplicity, as it is not necessary to worry about complex equations or calculations. However, the use of straight line basis has the disadvantage of potentially overlooking the true life span of an asset. Depending on the asset, it could be expected to have a longer useful life and should thus be expensed for a longer period of time than the straight line basis expects. Alternatives such as accelerated depreciation schedules can help address this issue and may be more suitable for a particular asset.
In conclusion, straight line basis is a popular method of calculating depreciation and amortization. It is easy to understand and calculate, but lacks flexibility in relation to the actual lifespan of an asset. As such, alternative methods may be more suitable in an effort to accurately reflect the true value of an asset.