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Straight Line Method

This is the first and one of the extensively used methods of providing depreciation. This method is based on the assumption of equal usage of the asset over its entire useful life. It is called straight line method because if the amount of depreciation and corresponding time period is plotted on a graph, it will result in a straight line (figure 7.1).

It is also called fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the asset. In this method, a fixed and an equal amount is charged as depreciation in every accounting period during the lifetime of an asset. The amount annually charged as depreciation is such that it reduces the original cost of the asset to its scrap value, at the end of its useful life. This method is also known as fixed percentage on original cost method because same percentage of the original cost (depreciable cost) is written off as depreciation from year to year.

The depreciation amount to be provided under this method is computed by using the following formula:


Depreciation = Cost of asset - Estimated residential Value
                               Estimated useful life of asset


Rate of depreciation under straight line method is the percentage of the total cost of the asset to be charged as deprecation during the useful lifetime of the asset. Rate of depreciation is calculated as follows:


Rate of Depreciation = Annual depreciation amount
                                ___________________________ X 100
                                            Acquisition Cost


Consider the following example; the original cost of the asset is Rs. 2,50,000. The useful life of the asset is 10 years and net residual value is estimated to be Rs. 50,000. Now, the amount of depreciation to be charged every year will be computed as given below:

Annual Depreciation Amount = Acquisition Cost of asset - Estimated net residential Value
                                                                     Estimated useful life of asset


                                i.e. = Rs.2,50,000-Rs.50,000
                                         __________________  =Rs.20,000

                                                    Fig. 7.1: Depreciation amount under straight line method


The rate of depreciation will be calculated as:

(i) Rate of Depreciation = Annual depreciation amount

                                   ___________________________ X 100

                                                     Acquisition Cost

From point (i), the annual depreciation amounts to Rs. 20,000.

Thus, the rate of depreciation will be = Rs.20, 000
                                                      __________ x100 =8%
                                                        Rs.2, 50,000

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