What is Straight Line Method of Depreciation?
A straight-line method of depreciation requires a fixed amount of depreciation to be charged on the assets every year. This method is also called the 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 costs that are incurred to bring and set up the assets. Under this 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 an 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 of depreciation
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 | Beginning 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)