11/03/2021

Depreciation - Straight line Method

  • A constant depreciation charge is calculated every year on the basis of total depreciation charges and useful life of equipment / property.

Let

P = Initial cost of equipment / plant

S = Salvage / Scrap value of equipment / plant

n = Life of equipment

Annual depreciation charge = P – S / n

  • Figure shows the graphical representation of annual depreciation charges considering straight line method. 

straight-line-method-of-depreciation.png


Advantages

  • Simple method
  • Easy to calculated annual depreciation charges

Disadvantages

  • This method does not consider interest on the annual depreciation charges.
  • As the equipment maintenance charges increases as it becomes older, constant depreciation charge per year is not correct.

Example

The cost of an electrical equipment is Rs.75,000 and its useful life is 10 years. The salvage value of equipment is Rs.5,000. Calculate annual depreciation charges using straight line method. Calculate the cost of equipment after 5 years.

Solution

P = Rs 75,000

S = Rs. 5,000

n = 10 years

Annual Depreciation charges = ( P – S ) / n

     = ( Rs. 75,000 – Rs. 5,000 ) / 10

     = Rs. 70,000 / 10

     = Rs. 7000

The cost of equipment after 5 years

= P – ( Annual Depreciation × 5 )

= Rs 75,000 – ( Rs. 7000 × 5 )

         = Rs 40,000

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