straight line depreciation
Straight line depreciation spreads the cost of an asset evenly over its useful life, so you deduct the same amount every year instead of guessing.
In plain English
Here is a mistake many small business owners make without realising it. They buy a generator for ₦900,000, use it fully in year one, and then write off the whole cost as an expense that same year, wondering why their business suddenly looks like it made no profit.
That single big deduction can make a thriving business look like it is struggling, which is a problem if you ever want a loan or want to show an investor that things are going well.
Straight line depreciation fixes this by spreading the cost across the years the asset will actually be useful. If that generator will serve the business for five years, you do not dump ₦900,000 into one year's accounts. You spread it out so each year carries its fair share of the cost.
A shop owner in Onitsha who buys a delivery van for ₦4,000,000 and expects to use it for eight years before it is worn out would record depreciation each year rather than treating the whole cost as one year's problem.
In the United Kingdom, a small design studio that buys laptops for staff will do the same thing, spreading the cost over three or four years rather than letting one year's accounts take the full hit.
This is why accountants love straight line depreciation. It is simple, it is fair to each accounting period, and it stops one year's profit figures from telling a lie about how the business is really doing.
A bakery in Lagos buys an oven for ₦1,200,000, expecting it to last six years with no resale value at the end. Straight line depreciation means ₦200,000 is deducted as an expense every year for six years, rather than the full ₦1,200,000 hitting the accounts in year one.
Questions people ask
What if the asset has some resale value at the end?
You subtract that expected resale value, called the salvage value, from the original cost first, then spread what remains over the useful life. So an oven bought for ₦1,200,000 with an expected resale value of ₦200,000 after six years would only spread ₦1,000,000, giving you about ₦166,667 a year.
Is straight line depreciation the only method?
No, there are other methods such as reducing balance depreciation, which deducts a bigger chunk in the early years and smaller amounts later. Straight line is simply the easiest to calculate and the most common for everyday assets like equipment, furniture, and vehicles.
Does depreciation mean the business is losing cash every year?
No, and this trips people up often. Depreciation is an accounting expense, not actual cash leaving the business. The cash left the account the day you bought the asset. Depreciation just spreads the record of that cost fairly across the years the asset is earning its keep.
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