Straight-line depreciation.

In plain English

Straight-line depreciation subtracts an asset's salvage value from its cost and divides the rest by its useful life, producing an identical expense every year. It is the simplest method and the one most companies use in the financial statements they publish. The expense reduces book profit but moves no cash, since the money left when the asset was purchased. Each year the asset's carrying value on the balance sheet drops by that same amount. A faster method is often used for tax purposes, which is why book depreciation and tax depreciation usually differ.

01Why it matters

It is why a profitable company can show a big expense in a year it bought nothing, and why an old asset can be nearly worthless on the books while still running fine in the shop.

02The math, step by step

Say a delivery van costs 40,000 dollars and is expected to be worth 4,000 dollars after six years. Annual depreciation is 6,000 dollars, from (40,000 minus 4,000) divided by 6. After three years the van's book value is 22,000 dollars (40,000 minus 18,000).

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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