Contents
Straight Line Basis
> Introduction to Straight Line Basis

### What is the concept of straight line basis in finance?

The concept of straight line basis in finance refers to a method of allocating the cost or value of an asset evenly over its useful life. It is a commonly used technique for calculating depreciation expense, amortization, or any other form of expense allocation in financial accounting. The straight line basis assumes that the asset's value diminishes at a constant rate over time, resulting in an equal amount of expense being recognized in each period.

Under the straight line basis, the total cost or value of the asset is divided by its estimated useful life to determine the annual depreciation or amortization expense. This expense is then recognized in equal installments over the asset's useful life. The formula for calculating straight line depreciation is straightforward: (Cost of Asset - Salvage Value) / Useful Life.

The straight line basis is widely employed due to its simplicity and ease of understanding. It provides a systematic and consistent approach to expense allocation, allowing for better comparability between different assets and periods. By recognizing equal amounts of expense each period, it helps to smooth out fluctuations in financial statements and facilitates more accurate financial reporting.

Moreover, the straight line basis aligns with the matching principle in accounting, which states that expenses should be recognized in the same period as the revenues they help generate. By allocating expenses evenly over an asset's useful life, it ensures that the costs associated with using the asset are appropriately matched with the revenues it generates.

While the straight line basis is a commonly used method, it does have some limitations. One limitation is that it assumes a constant rate of depreciation or amortization over an asset's useful life, which may not always reflect the asset's actual decline in value. Additionally, it does not consider factors such as accelerated obsolescence or changes in market conditions that may impact an asset's value.

In conclusion, the concept of straight line basis in finance is a method used to allocate the cost or value of an asset evenly over its useful life. It provides a systematic and consistent approach to expense allocation, aligning with the matching principle in accounting. While it has its limitations, the straight line basis remains a widely employed technique due to its simplicity and ability to facilitate accurate financial reporting.