Straight Line Rule
What Does Straight Line Rule Mean?
The straight line rule is a method to determine the depreciation of an asset or how much value it loses annually. To calculate it, first subtract an asset’s salvage value from its actual cost, and then divide that by the number of years in its useful life.
It is also known as straight line depreciation or straight light amortization.
Insuranceopedia Explains Straight Line Rule
For example, if you buy a $20,000 car with a salvage value of $5,000 and a useful life of 10 years, according to the straight line rule, it would depreciate at a rate of $15,000 divided 10 or $1,500 per year. It represents one of the simplest ways to calculate depreciation.
You can use it to estimate how much money you would get after a loss if you a property insurance policy that only pays for the fair market value at the time of damage, rather than the cost of a brand-new replacement.