Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Straight Line Method
Straight Line Method
The Straight Line Method of Depreciation
The Straight Line Method is the oldest and most widely used way to charge depreciation. Its core idea is that the asset gives equal service or benefit in each year of its useful life. Because the benefit is assumed to be uniform, the cost allocated to each year should also be uniform.
If you plot the depreciation amount on a graph against time, you get a perfectly straight horizontal line — hence the name. The amount does not change from year to year.
This method is also called the Fixed Instalment Method because the same fixed amount of depreciation is charged every year. Another name is Fixed Percentage on Original Cost Method, because the rate of depreciation is applied to the original cost (or more precisely, the depreciable cost) of the asset, not to its reducing book value.
How the Depreciation Amount is Calculated
The annual depreciation is found using this formula:
Annual Depreciation = (Cost of Asset – Estimated Net Residual Value) ÷ Estimated Useful Life of the Asset
Where:
- Cost of Asset is the original purchase price plus all expenses needed to bring the asset to its working condition (installation, freight, etc.).
- Estimated Net Residual Value is the scrap value expected to be realised at the end of the asset's life.
- Estimated Useful Life is the number of years the asset is expected to be used.
How the Rate of Depreciation is Calculated
The rate of depreciation under this method is the percentage of the acquisition cost that is charged as depreciation each year.
Rate of Depreciation = (Annual Depreciation Amount ÷ Acquisition Cost) × 100
Worked Example
Consider an asset purchased for ₹2,50,000. Its useful life is 10 years, and its estimated net residual value at the end of that life is ₹50,000.
Step 1: Compute the annual depreciation amount
Annual Depreciation = (₹2,50,000 – ₹50,000) ÷ 10 years = ₹2,00,000 ÷ 10 = ₹20,000 per year
Step 2: Compute the rate of depreciation
Rate of Depreciation = (₹20,000 ÷ ₹2,50,000) × 100 = 8% per annum
The rate of 8% is applied to the original cost of ₹2,50,000 every year. The depreciation amount remains ₹20,000 each year for all 10 years, regardless of the asset's book value.
Accounting Treatment
At the end of each accounting period, the following journal entry is passed:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Depreciation A/c ………Dr. | 20,000 | |||
| To Asset A/c | 20,000 | |||
| (Being depreciation charged on asset) |
Then, the Depreciation Account is closed by transferring it to the Profit & Loss Account:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Profit & Loss A/c ………Dr. | 20,000 | |||
| To Depreciation A/c | 20,000 | |||
| (Being depreciation transferred to Profit & Loss) |