Straight-line Method of Depreciation
In straight line depreciation method, depreciation is charged uniformly over the life of an asset. In this method, residual value of the asset is subtracted from its cost to get the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of periods to get the depreciation expense per period. Due to the simplicity of the straight line method of depreciation, it is the most commonly used depreciation method.
The formula to calculate the straight-line depreciation of an asset for a period is:
|Depreciation =||Cost − Salvage Value|
|Life in Number of Periods|
Example 1: On Jan 1, 2011 Company A purchased a vehicle costing $20,000. It is expected to have a value of $5,000 at the end of 4 years. Calculate depreciation expense on the vehicle for the year ended Dec 31, 2011.
We will first find the depreciable amount which is $15,000 ($20,000 cost minus $5,000 residual value). Then we divide the depreciable amount by the 4 which is the useful life of the vehicle. This will give a figure of $3,750 for the yearly depreciation.
Or by using the formula
Depreciation = ($20,000 − $4,000) / 4 = $3,750
Example 2: In many situations we may be required to charge depreciation for a period less than full financial year for example if the vehicle was purchased on July 1 and the year ends on December 31, then we will be required to charge depreciation for half year, in such situation depreciation will be calculated as follows:
Depreciation Expense = (6months/12months) × [ ($20,000 − $4,000) / 4 ] = $1,875