Straight-line method

Definition

The straight-line method is an amortization technique where the amount of interest expense and principal repayment are equally distributed over each period of the loan. It simplifies the calculation by spreading out the cost evenly across each accounting period.

5 Must Know Facts For Your Next Test

1. The straight-line method results in equal periodic interest expenses throughout the life of the liability.
2. This method is simpler compared to the effective-interest method, which adjusts for changing balances.
3. It is often used for bond amortization when simplicity and consistency are prioritized.
4. Interest expense calculated using this method may differ from actual interest paid over time.
5. Straight-line amortization can impact financial statements differently than other methods due to its uniform expense distribution.

Review Questions

Related terms

Effective-Interest Method: An amortization technique that allocates interest expense based on a constant periodic rate applied to the carrying amount of debt.

Amortization Schedule:

A table detailing each periodic payment on a loan, typically breaking down principal and interest components.

Long-Term Liability: Financial obligations or debts that are due beyond one year from the balance sheet date.