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:
OC = Original cost of the assets
SV = Salvage value, residual value, Scrap value
N = Estimated life of the assets
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.
a. Calculate annual depreciation.
b. Prepare the depreciation schedule.
c. Journalize the depreciation for the third year.
Using the straight line method
Original cost = Rs. 10,00,000
Salvage value = Rs. 2,00,000
Life of the vehicle = 5 years
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
Straight line d
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)