 Depreciation is the process of allocating the cost of a long-term plan asset to expense over its useful life. We allocate assets' cost to expense with the following adjusting journal entry. We debit depreciation expense and we credit accumulated depreciation for the amount of expense. In this video, let's learn how to calculate depreciation expense with the straight-line method. In order to calculate depreciation expense, we need three values. One is known asset cost and the other two are estimated, residual value and the useful life. The formula for the straight-line method is the asset cost minus the residual value divided by the useful life in years. That result equals the amount of annual depreciation expense and we would record that in our adjusting journal entry. So let's look at an example. On January 1, the Pixies purchased a touring bus for an upcoming concert tour. The bus cost $250,000 and has an estimated useful life of five years. At the end of the five years, it's estimated that the bus will have a value of $50,000. Using the straight-line method, let's calculate the amount of depreciation expense and the asset's book value at year end. The formula is cost minus residual value divided by useful life in terms of years. So $250,000 minus $50,000, that gives us $200, then divide that by five years and we get annual depreciation expense of $40,000 per year. We can record the adjusting journal entry by debiting depreciation expense and crediting accumulated depreciation for $40,000. The book value is the cost of the asset minus its accumulated depreciation. So cost of $250,000 minus accumulated depreciation of $40,000 gives us a net book value of $210,000. The final concept related to straight-line depreciation is partial year depreciation. When assets are placed into service on dates other than the first of the year, we need to adjust how much depreciation we record in the first year. So let's look at our previous example only. Let's change the acquisition date. On July 1, the Pixies purchased a touring bus for an upcoming concert tour. The bus cost $250,000, has an estimated useful life of five years. At the end of the five years it's estimated the bus will have a value of $50,000. So we use the same formula, the straight-line formula we take the cost of $250,000 minus the residual value of $50, that equals $200, then divide that by five years and we get the annual depreciation expense of $40,000 per year, except the Pixies didn't have the bus for a full year. They had it for half a year. So let's multiply the annual depreciation of $40,000 by six-twelts to get $20,000 for year one. Now we can record the adjusting journal entry by debiting depreciation expense and crediting accumulated depreciation for $20,000. Finally, the book value is the cost of $250,000 minus accumulated depreciation of $20,000 gives us a net book value of $230,000.