A tool designed to compute the annual reduction in the value of an asset using the simplest method. This technique distributes the cost of an asset evenly over its useful life. For example, if a machine costs $10,000 and has a salvage value of $2,000 with a useful life of 5 years, the yearly reduction would be calculated by subtracting the salvage value from the initial cost, then dividing the result by the useful life: ($10,000 – $2,000) / 5 = $1,600 per year.
Employing such a tool provides several benefits. It offers ease of use and understandability, making it accessible to individuals without extensive accounting knowledge. It allows for consistent financial reporting and facilitates accurate budget projections based on predictable expenses. Historically, its simplicity made it a preferred method before the advent of sophisticated accounting software.
