In view of the coronavirus pandemic, we are making LIVE CLASSES and VIDEO CLASSES completely FREE to prevent interruption in studies
Concept And Accounting of Depreciation

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

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

 

Straight line method (SLM)Source: Shutterstock

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 31st 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.

Share with friends

Customize your course in 30 seconds

Which class are you in?
5th
6th
7th
8th
9th
10th
11th
12th
Get ready for all-new Live Classes!
Now learn Live with India's best teachers. Join courses with the best schedule and enjoy fun and interactive classes.
tutor
tutor
Ashhar Firdausi
IIT Roorkee
Biology
tutor
tutor
Dr. Nazma Shaik
VTU
Chemistry
tutor
tutor
Gaurav Tiwari
APJAKTU
Physics
Get Started

Leave a Reply

avatar
  Subscribe  
Notify of

Get Question Papers of Last 10 Years

Which class are you in?
No thanks.