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Straight line method of depreciation (SLM)

Under this method, an equal amount of depreciation is written off every year during the useful life of an asset. The depreciation is charged on the original cost of the asset every year. The cost of the asset will reduce to nil (zero) or its residual value at the end of its useful life. This method is also known as fixed instalment method or original cost method

 

Formulae:

 
 

 

 

Note: When r% is given in the question, apply the r% directly on cost of fixed assets to find the amount of depreciation.

 


Suitability

 

This method is suitable for an asset in relation to which

  • Repairs are less
  • The possibility of obsolescence is less

This method is suitable for assets like furniture, patent, copyright, trademark etc.
 

Illustration 2

 

On 1st April 2012, A Ltd. purchased a second hand machine for ₹ 40,000 and spent ₹ 10,000 on its cartage, repairs and installation. The residual value at the end of its expected useful life of 4 years is estimated at ₹ 20,000. On 30th Sept. 2013, repairs and renewals amounted to ₹ 2,000. Depreciation is to be provided according to Straight Line Method.
 

Required: Prepare Machinery Account and Depreciation Account for the first three years assuming that the accounts are closed on 31st March each year.
 

Solution:
 



 

Working Notes:

 

Calculation of the rate of depreciation
 

Step 1: Calculation of total cost of asset = ₹ 40,000 + ₹ 10,000 = ₹ 50,000
 

Step 2: Calculation of amount of depreciation per year

 

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Step 3:
 Calculation of rate of depreciation under SLM

 

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Illustration 3 [Machinery Account when an asset is sold during the year]

 

On 1st January 2013, A Ltd. purchased a second hand machine for ₹ 40,000 and spent ₹ 10,000 on its cartage, repairs and installation. The residual value at the end of its expected useful life of 4 years is estimated at ₹ 20,000. On 30th Sept. 2013, repairs and renewals amounted to ₹ 2,000. On 30th Sept. 2014, this machine was sold for ₹ 25,000. Depreciation is to be provided according to Straight Line Method.
 

Required: Prepare Machinery Account for the first three years assuming that the accounts are closed on 31st March each year.
 

Solution:

 



Working Notes:

 

(i) Calculation of Profit / Loss on Sale of Machine.

 

 

(ii) The amount spent on repairs and renewals on 30-9-2013 is of revenue nature and not of capital nature and hence, not debited to Machinery Account.





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