Straight-line Method of Depreciation
In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting periods to obtain depreciation expense per accounting 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 full accounting 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 − $5,000) / 4 = $3,750
Example 2: Occasionally, we may need to charge depreciation for a period less than full financial year. For example, if the vehicle was purchased on July 1, the depreciation should be charged only for a portion of the financial year. In such situation we multiply the full year straight line depreciation formula by the fraction the asset has been used in the current accounting period. This is illustrated below.
Depreciation Expense = (6months/12months) × [ ($20,000 − $5,000) / 4 ] = $1,875
Written by Obaidullah Jan, ACA, CFA