 # Straight line depreciation or Original cost method | definition – example

## Definition of straight line depreciation

A straight line method of depreciation requires a fixed amount of depreciation to be charged on the assets every year. This method also called original cost method, fixed installment method, equal installment method. The depreciation is calculated on the original cost of the assets.

The original cost is the acquisition cost of the assets which includes invoice cost and all additional cost that are incurred to bring and set up the assets. Under the straight-line depreciation method the depreciation can be calculated using the following formula:

Where,

OC = Original cost of the assets

SV = Salvage value, residual value, Scrap value

N = Estimated life of the assets

#### For example:

A Company Limited purchased a vehicle for Rs. 10,00,000. The vehicle has its estimated life is 5 years. At the end of the 5 years it is estimated at the vehicle to be sold at Rs. 2,00,000.

Required:

a. Calculate annual depreciation.

b. Prepare the depreciation schedule.

c. Journalize the depreciation for the third year.

Solution:

## Using the straight line method

a.

Given,

Original cost = Rs. 10,00,000

Salvage value = Rs. 2,00,000

Life of the vehicle = 5 years

Now,

Annual depreciation = Original cost – Salvage value / Life of the vehicle = Rs. 10,00,000 – Rs. 2,00,000 / 5 = Rs. 8,00,000 / 5 = Rs. 1,60,000

Therefore, required annual depreciation = Rs. 160,000

b.

### Straight line depreciation schedule

 Year Beginningvalue (Rs.) Annualdepreciation(Rs.) Accumulateddepreciation(Rs.) Ending value (Rs.) 12345 10,00,000840,000680,000520,000360,000 160,000160,000160,000160,000160,000 160,000320,000480,000640,000800,000 840,000680,000520,000360,000200,000

c.

### Journal entry

Depreciation a/c Dr. Rs. 160,000

Accumulated depreciation a/c Rs. 160,000

(To record the depreciation charge on vehicle on the third year)