The Straight-Line Amortization Method Formula

straight line amortization calculation

For example, a 30-year loan would include 360 monthly payment periods. Therefore, $730,445 divided into 360 monthly payments results in a monthly payment amount of $2,029.01. Accountants use the straight line depreciation method because it is the easiest to compute and can be applied to all long-term assets. However, the straight line method does not accurately reflect the difference in usage of an asset and may not be the most appropriate value calculation method for some depreciable assets.

straight line amortization calculation

Goodwill is the portion of a business’ value not attributable to other assets. Goodwill is a common result of acquisitions where the purchase price is greater than the fair market value of the assets and liabilities.

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The equipment has an expected life of 10 years and a salvage value of $500. To calculate straight line basis, take the purchase price of an asset and then subtract the salvage value, its estimated sell-on value when it is no longer expected to be needed.

Depreciation is considered an expense and is listed in an income statement under expenses. In addition to vehicles that may be used in your business, you can depreciate office furniture, office equipment, any buildings you own, and machinery you use to manufacture products.

Straight-Line Depreciation

The Excel equivalent function for Straight-Line Method is SLN will calculate the depreciation expense for any period. For a more accelerated depreciation method see, for example, our Double Declining Balance Method Depreciation Calculator. While the purchase price of an asset is known, one must make assumptions regarding the salvage value and useful life.

  • Here, we can see how much we pay towards principal and interest each period, the total payment each period, and the remaining balance.
  • Banks tend to use this approach because it is easy to understand, especially when explaining the repayments to customers applying for loans or mortgages.
  • In using the declining balance method, a company reports larger depreciation expenses during the earlier years of an asset’s useful life.
  • The cost of an existing patent is the amount the company paid for the patent.
  • In some instances, bonds lose value, and a company must pay the bond back up to its initial price.

It paid with cash and, based on its experience, estimates the truck will likely be in service for five years . Aided by data from a trusted guide for vehicle-pricing estimates, and estimating mileage and future condition, KMR estimates that the delivery truck will be sellable for about $15,000 at the end of five years. Determine the fixed asset’s all-in cost, which includes the cost of the asset plus any costs to put it into service. It has wide application to many fixed assets, especially when their obsolescence is simply due to passage of time. Straight-line depreciation is an accounting process that spreads the cost of a fixed asset over the period an organization expects to benefit from its use.

How is the straight-line method of amortization applied in valuing a bond?

The bookkeeping and accounting concept of depreciation is really pretty simple. Measuring the loss in value over time of a fixed asset, such as a building or a piece of equipment or a motor vehicle, is known as depreciation.

After goodwill is calculated, estimate the useful life of goodwill and amortize the intangible asset. For example, your small business acquires a company with fair value assets of $100,000 and liabilities totaling $50,000. The calculation for the straight-line method is ($100,000 – $50,000) / 5, which equals $10,000. Your company needs to debit amortization expense for $10,000 and credit goodwill for $10,000 annually for the next five years. Adding https://online-accounting.net/ to the difficulty, businesses may use different depreciation methods for its various categories of fixed assets, each with its own depreciation schedule. What’s more, different depreciation schedules may be needed for book and tax purposes, as well. Robust automated accounting NetSuite Cloud Accounting Software, can take over this tedious process, reducing the potential for error and freeing employees to work on higher-value activities.

Bond Discount with Straight-Line Amortization

Ryan Cockerham who has written extensively within the real estate and finance domain. This simple amortization calculator requires you to provide basic information about your loan, which can be found on your loan documents. A graphic chart requires finding a specific month straight line amortization calculation on a chart’s line and then finding the corresponding amounts of principal and interest by reading the X and Y axes in the chart. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

How do you calculate loan amortization?

How to Calculate Amortization of Loans. You'll need to divide your annual interest rate by 12. For example, if your annual interest rate is 3%, then your monthly interest rate will be 0.25% (0.03 annual interest rate ÷ 12 months). You'll also multiply the number of years in your loan term by 12.

Additionally, integration with NetSuite Fixed Assets Management can help ensure that depreciation and asset inventory are aligned, records are accurate and depreciation rules are applied consistently. Straight line depreciation is the simplest way to allocate the cost of an asset over multiple years in fixed asset accounting.

How does straight line amortization work?

When discussing mortgage plans with their clients, they present the straight-line amortization method as an alternative to the classic mortgage-style amortization method, which divides the debt into equal payments. The straight-line amortization is a way of calculating debt repayment. Its main characteristic is the fact that it allocates the same amount of interest for each payment until the debt is repaid. It does so by dividing the total amount of owed interest by the number of payments that need to be made.

It is calculated by dividing the difference between an asset’s cost and its expected salvage value by the number of years it is expected to be used. They use it to outline the process of expensing an asset over a longer time period to their clients and formulate a payment plan. Interest Is PayableInterest Payable is the amount of expense that has been incurred but not yet paid. Amortization is how you measure the loss in value of an intangible asset’s expense. If rounding is required for amounts when using the Straight-line, prorate first & last period method, then the rounding difference is added to the next to the last period.

Sara runs a small nonprofit that recently purchased a copier for the office. It cost $150 to ship the copier, and the taxes were $600, making the final cost of the copier $8,250. Many or all of the products here are from our partners that pay us a commission. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

straight line amortization calculation

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life to account for declines in value over time. To calculate depreciation using a straight line basis, simply divide net price by the number of useful years of life the asset has.

What Is Straight Line Basis?

This is the expense that is recorded on the income statement each year. The double-declining balance method is a form of accelerated depreciation. It means that the asset will be depreciated faster than with the straight line method. The double-declining balance method results in higher depreciation expenses in the beginning of an asset’s life and lower depreciation expenses later. This method is used with assets that quickly lose value early in their useful life. A company may also choose to go with this method if it offers them tax or cash flow advantages. The straight line method of depreciation provides small business owners with an easy and simple formula for depreciation.

Most companies use the straight-line method to amortize intangible assets because the assets operate consistently over time. The disadvantage of the straight-line method is that it recognizes tax expenses slower than accelerated methods of amortization. Expenses reduce net income, which consequently reduce a company’s tax liability. If, for example, they are sold below their market rate, the difference between their market cost and their actual price needs to be factored in the amortization costs. Straight line amortization means the same thing as straight line depreciation.

The Straight-Line Amortization Method Formula