Linear damping | Magicfit

Understand the linear cushioning in the accounting

Linear amortization is a fundamental concept in accounting that allows you to distribute the cost of an activity in its useful life of life.

One of the most used methods is linear damping.

In this article, we will explore the functioning of this method, its advantages and disadvantages, as well as practical examples to illustrate its application.

What is linear damping?

Linear damping is a method that consists in the uniform distribution of the cost of an activity for each period of its duration of life.

This means that the same amount is deducted every year until the value of the activity reaches zero or its residual value.

The need for dampening

Before entering the details of the linear method, it is important to understand why damping is necessary.

When a company acquires an asset, it does not immediately lose its value.

Instead, its value gradually decreases due to wear, obsolescence or other factors.

The damping therefore allows to reflect this decrease in value in the budget, thus ensuring that the benefits of a company are not inflated by activities that lose value.

Linear amortization formula

The formula for calculating linear damping is as follows:

[ text{Amortissement Annuel} = frac{text{Coût de l’Actif} – text{Valeur Résiduelle}}{text{Durée de Vie Utile}} ]

• Activity : The purchase price of the activities, including all the associated costs to put it in service.
• Residual value : The esteemed value of activities at the end of its duration of life, i.e. what it is worth when it ends at the end of its use.
• All life : The number of years during which the activities should be used.

Advantages of linear amortization

1 – Simplicity : The method is easy to understand and apply. You just have to know the cost, the residual value and the duration of the activities to calculate the annual amortization.

2 – predictability : Companies can constantly provide amortization costs. This facilitates financial and budget planning, since the amortization costs remain the same every year.

3 – Stability of the results : Thanks to its uniform nature, linear damping allows you to avoid significant fluctuations in the financial results from one year to the next, thus offering a more stable vision of the company’s services.

4 – ease of integration : This method adapts well to other accounting practices and is often required by accounting standards for long -term activities.

5 – Transparency : The linear damping costs are easy to explain to the parties involved, which helps to maintain the trust of investors and drilling.

Disadvantages of linear amortization

1 – does not reflect real use : Although linear damping is simple, it does not take into account the actual use of resources. Some resources can quickly lose value at the beginning of their life of use, while others can depict more slowly.

2 – Not adapted to all activities : For some resources, such as technologies that quickly become obsolete, other methods of damping, such as the decline of damping, can be more appropriate.

3 – Impact on cash flows : Linear damping can give a deceptive image of cash flows, because it does not reflect the real commitment to maintain the activity.

4 – rigidity : Companies that experience seasonal or cyclical variations in the use of their resources can discover that the linear method does not adapt well to their needs.

Practical example

Imagine that a company purchases a machine for € 10,000 with a residual value of € 1,000 and a useful duration of 5 years.

We calculate the annual amortization: