What is linear depreciation
Linear depreciation means distributing the value of an asset in the accounting with a fixed amount per year, based on how long you expect the asset to last.
Linear depreciation represents an accounting methodology whereby the value of an asset is evenly distributed as an expense across its expected useful life.
Typically, companies resort to depreciating assets in their financial ledgers if the assets have a lifespan exceeding a certain number of years. Business taxpayers are able to immediately deduct items that cost less than AUD 100 and choose to write off all items costing less than AUD 1,000 through a low-value pool.
Businesses have the choice of depreciating an asset through either linear depreciation or declining balance depreciation. The latter implies reducing the asset’s value by a fixed state-determined percentage each year, which is usually enacted in the company’s tax return.
How to depreciate with linear depreciation
To calculate linear depreciation, one must divide the purchase price of the asset by its anticipated operational lifespan. For instance, if a second-hand van is acquired for 400,000 Australian dollars with a projected lifespan of 5 years:
400,000 Australian dollars / 5 years = 80,000 Australian dollars annually.
This calculation indicates that the van should be depreciated by 80,000 Australian dollars every year on the accounts.
Applicability of Linear Depreciation
Linear depreciation is predominantly utilised by proprietary limited companies within their annual financial reporting.
For numerous businesses, linear depreciation provides a more accurate reflection of an asset’s value, as the key objective of annual financial statements is to present an accurate financial portrait of the company—including assets and liabilities—to stakeholders such as regulatory bodies, investors, potential employees, and other interested companies.