Listen to a Business English Dialogue About Straight line depreciation
Kinsley: Hey Billy, do you know what straight line depreciation is?
Billy: Hi Kinsley, yes, straight line depreciation is a method used to allocate the cost of an asset evenly over its useful life, resulting in a constant depreciation expense each year.
Kinsley: I see. How is straight line depreciation calculated?
Billy: Well, Kinsley, to calculate straight line depreciation, you subtract the salvage value of the asset from its initial cost, and then divide that by its useful life in years to determine the annual depreciation expense.
Kinsley: That sounds straightforward. Are there any advantages to using straight line depreciation?
Billy: Yes, Kinsley, one advantage of straight line depreciation is its simplicity and ease of use, making it a popular choice for businesses to calculate depreciation expenses accurately over time.
Kinsley: Got it. Are there any limitations to using straight line depreciation?
Billy: Well, Kinsley, one limitation is that it doesn’t account for the varying usage or productivity of an asset over its useful life, which may not accurately reflect its actual depreciation pattern.
Kinsley: That’s interesting. Can you give an example of how straight line depreciation works in practice?
Billy: Sure, Kinsley. For instance, if a company purchases equipment for $10,000 with a salvage value of $1,000 and a useful life of 5 years, the annual depreciation expense would be $1,800 ($10,000 – $1,000 / 5).
Kinsley: Thanks for the example, Billy. It helps to understand how straight line depreciation is applied to assets.
Billy: You’re welcome, Kinsley. Straight line depreciation is a fundamental concept in accounting and finance, crucial for businesses to accurately reflect the value of their assets over time.