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Straight-line Method
According to the straight line method, an equal amount is written off (provided
as depreciation) every year during the working life on an asset so as to reduce
the cost of the asset to nil or its residual value at the end of its useful life.
This is most common and simplest form or method of providing depreciation. The underlying
assumption of this method is that the particular asset generates equal utility during
its lifetime.
The formula to calculate depreciation is
Cost of asset – Scrap value
Useful life of the asset
Useful life of the asset
Advantages:
- The amount of depreciation and the rate does not change over the useful economic life of the asset;
- The calculation is relatively simple and easy to understand and apply;
Disadvantages:
- The underlying assumption of this method is its biggest drawback. To assume that an asset generates equal utility during its lifetime is not true in most circumstances. This method does not recognize the varying utility of an asset over its life and fails to allocate amount to the accounting period based on its utility during the period.
Example:
If the cost of the assets is $100,000, the expected salvage value is $20,000 and the estimated useful life is 4 years, calculate the annual depreciation per year.
The annual depreciation in this case would be:
If the cost of the assets is $100,000, the expected salvage value is $20,000 and the estimated useful life is 4 years, calculate the annual depreciation per year.
The annual depreciation in this case would be:
$100,000 - $20,000
4 years
= $20,000
4 years
= $20,000
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Other topics under Depreciation Calculation:
