straight line depreciation mehtod

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:

straight line depreciation formula
Straight line depreciation 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

YearBeginning
value (Rs.)
Annual
depreciation
(Rs.)
Accumulated
depreciation
(Rs.)
Ending
value (Rs.)
1
2
3
4
5
10,00,000
840,000
680,000
520,000
360,000
160,000
160,000
160,000
160,000
160,000
160,000
320,000
480,000
640,000
800,000
840,000
680,000
520,000
360,000
200,000

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)


 

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