Straight Line Depreciation: The Intuition
Imagine you buy a delivery van for your business. It costs ₹10,00,000. You expect to use it for 5 years, after which you'll sell it for ₹1,00,000 as scrap.
Does the van lose all its value in year 1? No. It loses value gradually, year after year, as you drive it, put miles on it, and it gets older. The van is an asset — something of value you own — and its value decreases over time. That decrease is called depreciation.
The simplest way to think about this loss is: the van loses the same amount of value every year. That's straight line depreciation. It's like slicing a cake into equal pieces — each year gets an equal share of the total loss in value.
The Precise Statement
Annual Depreciation=Useful LifeCost of Asset−Residual Value
Where:
- Cost of Asset = What you paid to buy and get it ready for use (purchase price + delivery + installation, etc.)
- Residual Value (also called scrap value or salvage value) = What you expect to get when you sell it at the end of its useful life
- Useful Life = How many years you expect to use the asset
Applying It to Our Van
Cost = ₹10,00,000
Residual Value = ₹1,00,000
Useful Life = 5 years
Annual Depreciation=510,00,000−1,00,000=59,00,000=₹1,80,000
So every year, you record ₹1,80,000 as depreciation expense. After 5 years, the van's book value (original cost minus total depreciation) will be exactly ₹1,00,000 — its residual value.
The Depreciation Schedule
| Year | Book Value at Start of Year | Depreciation Expense | Book Value at End of Year |
|---|
| 1 | ₹10,00,000 | ₹1,80,000 | ₹8,20,000 |
| 2 | ₹8,20,000 | ₹1,80,000 | ₹6,40,000 |
| 3 | ₹6,40,000 | ₹1,80,000 | ₹4,60,000 |
| 4 | ₹4,60,000 | ₹1,80,000 | ₹2,80,000 |
| 5 | ₹2,80,000 | ₹1,80,000 | ₹1,00,000 |
Notice: the depreciation expense is constant every year. That's the "straight line."
Why Use This Method? …