USA How are fixed costs and straight line depreciation connected?


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For the life of me, I cannot understand these concepts. Can somebody please explain this using an analogy that's easy to comprehend?
 

Steve-LevelUp

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They are not connected at all. A fixed cost (like rent) is the same regardless of whether the place us bustling with activity, or the building sits empty. It is Fixed, relative to usage.

Straight line depreciation is about spreading the effective cost of a fixed asset over the lifetime. EG, you spend, in Cash, $1,000,000 for a large piece of equipment. Experts say that it will be useful for 10 years before being obsolete. You can then record a straight line depreciation of $100,000 per year.

I hope that helps.
 
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Joined
Jan 4, 2018
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0
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United States
They are not connected at all. A fixed cost (like rent) is the same regardless of whether the place us bustling with activity, or the building sits empty. It is Fixed, relative to usage.

Straight line depreciation is about spreading the effective cost of a fixed asset over the lifetime. EG, you spend, in Cash, $1,000,000 for a large piece of equipment. Experts say that it will be useful for 10 years before being obsolete. You can then record a straight line depreciation of $100,000 per year.

I hope that helps.
Thank you Steve. Your reply was very insightful! I appreciate it.
 

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