Depreciation Methods - Straight line

Straight Line method of providing depreciation is perhaps the most poular and simple means of calculating depreciation to be charged on assets. Popularly known as SLM, this system proposes to write off the cost of assets equally through out the use full life of the asset.For example a asset costs Rs 200000.00 and the same is to be used for 4 years.
As per SLM, depreciation will be charged @ Rs 50000.00 i.e (Rs 200000.00 / 4 yrs) for each year.

However, if organisation feels that a particular asset will have a residual value after its useful life is over, it needs to depreciate only the difference between cost and its anticipated residual value at the end of its usefull life.

So in the example above if the anticipated residual value is Rs. 10000.00 then the organisation needs to depreciate only Rs 190000.00 (i.e. Rs 200000.00 - Rs. 10000.00) over 4 years. In this case the annual depreciation will be Rs. 47500.00


Now lets look at some examples which will cement the concepts stated above.

Example 1.

ABC Ltd buys a asset for Rs 100000.00. The useful life of the same was 5 years. However ABC Ltd feels that the asset would have a residual value of Rs 10000.00 at the end of its useful life. What will be the annual depreciation charged for this asset?

Solution 1.

Cost of Asset		100000
Less: Estimated residual value		10000
Cost to be written off in 5 yrs		90000
Annual Depreciation(90000/5)		18000

Depreciation on Assets - a understanding

Depreciation is a reduction in value of Assets due to reasons like wear and tear, obsolence so on and so forth. Depreciation can also be looked upon as the cost of using an asset. To use a asset we buy the same by paying a cost. But the same cost does not belong to any particular year as the assets will be used over more than one finacial year. By providing depreciation we are actually spreading the cost of an asset over its useful life.

Depreciation is a important consideration for any finacial statement. Its presence in finacial statement is abosolute for financial statements to give correct financial position of the organisation.

Now, when it is clear what is depreciation, question arises how is it calculated? Do we simply spread the cost of asset equally over its useful life?? Or do we need some other methods??

Well, depreciation can be provided for using various method one of which is mentioned in the question above. When we distribute cost of asset over its useful life equally the method is called Straight Line Method for providing depreciation.