The simplest and most commonly used, straight line depreciation is calculated by taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total productive years the asset can be reasonably expected to benefit the company called “useful life” in accounting jargon.

Annual Depreciation Expense =

purchase price of asset - approximate salvage value

———————- (divided by) ———————-

estimated useful life of asset

Example: You buy a new computer for your business costing approximately \$5,000. You expect a salvage value of \$200 selling parts when you dispose of it. Accounting rules allow a maximum useful life of five years for computers; in the past, your business has upgraded its hardware every three years, so you think this is a more realistic estimate of useful life, since you are apt to dispose of the computer at that time. Using that information, you would plug it into the formula:

\$5,000 purchase price - \$200 approximate salvage value

———————- (divided by) ———————-

3 years estimated useful life

The answer, \$1,600, is the depreciation charges your business would take annually if you were using the straight line method.