Straight Line Method (Fixed Instalment Method)

The Straight Line Method (SLM) — also called the Fixed Instalment Method or the Original Cost Method — is the simplest and most widely used method of depreciation, and the first of the two methods on the syllabus.

The idea. An equal amount of depreciation is charged every year of the asset's useful life, calculated on the original cost of the asset. Because the same rupee amount is deducted year after year, a graph of the asset's book value against time is a straight line falling steadily to the scrap value — hence the name.

Formula.

Annual Depreciation = (Original Cost − Estimated Scrap Value) ÷ Estimated Useful Life (in years)

The rate of depreciation (expressed as a percentage of original cost) can then be found as:

Rate of Depreciation (%) = (Annual Depreciation ÷ Original Cost) × 100

Worked illustration. A firm purchases machinery for ₹75,000. Its estimated scrap value at the end of its useful life is ₹5,000, and its useful life is estimated at 7 years.

Annual Depreciation = (75,000 − 5,000) ÷ 7 = 70,000 ÷ 7 = ₹10,000 per year.

Rate of Depreciation = (10,000 ÷ 75,000) × 100 = 13.33% (approx.) on original cost.

Because the amount charged is the same every year, the book value falls by equal steps:

The book value would keep falling by exactly ₹10,000 every year until, after 7 years, it reaches the estimated scrap value of ₹5,000 — never below it. …