Straight Line Method

Depreciation means the decrease in the value of fixed assets due to normal wear and tear, efflux of time or obsolescence due to technology. Thus, it is important to measure the decrease in value of an asset and also account for it. There are various methods of providing depreciation. The most common method is the Straight line method (SLM).

Browse more Topics under Concept And Accounting Of Depreciation

• Concept and Meaning of Depreciation
• Cost of Asset for Calculating Depreciation
• Diminishing Balance Method
• Units of Production Method
• Annuity Method
• Sinking Fund Method
• Profit or Loss on Disposal of Asset
• Change in Method of Depreciation

Straight Line Method (SLM)

According to the Straight line method, the cost of the asset is written off equally during its useful life. Therefore, an equal amount of depreciation is charged every year throughout the useful life of an asset. After the useful life of the asset, its value becomes nil or equal to its residual value. Thus, this method is also called Fixed Installment Method or Fixed percentage on original cost method.

When the amount of depreciation and the corresponding period are plotted on a graph it results in a straight line. Hence, it is known as the Straight line method (SLM).

This method is more suitable in case of leases and where the useful life and the residual value of the asset can be calculated accurately. However, where the repairs are low in the initial years and increase in subsequent years, this method will increase the charge on profit.

Also, while applying this method, the period of use of the asset should be considered. If an asset is used only for 3 months in a year then depreciation will be charged only for 3 months. However, for the Income Tax purposes, if an asset is used for more than 180 days full years’ depreciation will be charged.

Formulae:

Amount of Depreciation = (Cost of Asset – Net Residual Value) / Useful Life

The rate of Depreciation = (Annual Depreciation x 100) / Cost of Asset

 

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Journal Entries for Straight Line Method of Depreciation

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. Purchase of asset	Asset A/c	Dr.	xx
	To Cash/ Bank/ Creditor’s A/c			xx
	(Being asset purchased)
2. Charge Depreciation	Depreciation on Asset A/c	Dr.	xx
	To Asset A/c			xx
	(Being depreciation charged on asset)
3. Transfer Depreciation	Profit & Loss A/c	Dr.	xx
	To Depreciation on Asset A/c			xx
	(Being depreciation on asset transferred to profit and loss account)

 Solved Example For You

Q. Anil purchased a machine on 1 Apr 2015 for ₹400000. The useful life of the machine is 3 years and its estimated residual value is ₹40000. At the end of its useful life, the machine is sold for 50000. Prepare the necessary ledger accounts in the books of Anil for the year ending 31^st December every year. Use SLM.

Ans: In the books of Anil

Machinery A/c

Date	Particulars	Amount		Date	Particulars	Amount
2015				2015
1 Apr	To Cash A/c	400000		31 Dec	By Depreciation A/c	90000
				31 Dec	By balance c/d	310000
		400000				400000
2016				2016
1 Jan	To balance b/d	310000		31 Dec	By Depreciation A/c	120000
				31 Dec	By balance c/d	190000
		310000				310000
2017				2017
1 Jan	To balance b/d	190000		31 Dec	By Depreciation A/c	120000
				31 Dec	By balance c/d	70000
		190000				190000
2018				2018
1 Jan	To balance b/d	70000		31Mar	By Depreciation A/c	30000
				31 Mar	By Cash A/c	40000
		70000				70000

Depreciation A/c

Date	Particulars	Amount		Date	Particulars	Amount
2015				2015
31 Dec	To Machinery A/c	90000		31 Dec	By Profit & Loss A/c	90000
		90000				90000
2016				2016
31 Dec	To Machinery A/c	120000		31 Dec	By Profit & Loss A/c	120000
		120000				120000
2017				2017
31 Dec	To Machinery A/c	120000		31 Dec	By Profit & Loss A/c	120000
		120000				120000
2018				2018
31 Mar	To Machinery A/c	30000		31 Dec	By Profit & Loss A/c	30000
		30000				30000

Working Notes:

Calculation of amount of depreciation

Depreciation =  (Cost of Asset – Net Residual Value )/Useful life

= (400000 – 40000)/3 = 120000 p.a.