# 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).

## 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 yearsâ€™ depreciation will be charged.

Formulae:

Amount of Depreciation = (Cost of Asset â€“ Net Residual Value) / Useful Life

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

Source: Shutterstock

### Journal Entries for Straight Line Method of Depreciation

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

## Â Solved Example For You

Q. Anil purchased a machine on 1 Apr 2015 for â‚¹400000. The useful life of the machine is 3 years and its estimated residual value is â‚¹40000. 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:Â In the books of Anil

Machinery A/c

 Date Particulars Amount Â 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 Â 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 =Â  (Cost of Asset â€“ Net Residual Value )/Useful life

= (400000 â€“ 40000)/3 = 120000 p.a.

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