The Straight Line approach determines an annual depreciation of a said amount. Every year, the rate of depreciation using this strategy does not vary. In addition, the amount depreciated is constant over its life. The process of depreciating and amortising an item over a longer time, than when it was acquired is known straight-line basis. Straight-line depreciation is preferred because it is simple to compute and comprehend, but it does have certain disadvantages.

Straight Line Method

The Straight Line Depreciation Method is among the most common techniques of depreciation, in which the asset depreciates equally during its useful life and the asset’s cost is evenly distributed across its usable life.

Depreciation and amortisation are calculated on a straight-line basis. It’s also termed straight-line depreciation, and it’s the easiest technique to figure out how much an item has lost in value over time. To compute a straight-line basis, divide the difference between the cost and the predicted salvage value of an asset by the number of years of useful life.

Straight Line Method of Depreciation

Straight-line depreciation is a typical technique of depreciation, which reduces the value of a fixed asset evenly during its useful life. The straight-line method of depreciation is also known as the fixed instalment method of depreciation.

It’s a method of lowering a fixed asset’s carrying value over its useful life. On your tax revenue statement or corporate balance sheet, you can show how critical assets depreciate and the following details can also be analysed.

• The asset’s cost, how much the company spent for it or how much it was used for
• The salvage value, also known as scrap value or residual value, is an estimate of how much a corporation expects to get for an asset when it reaches the end of its useful life
• The asset’s useful life is the predicted period it will be functioning before it has to be replaced or discarded

Straight Line Method of Depreciation Formula

The following formula can be used to compute the straight-line method of depreciation:

Depreciation Per Annum = (Cost of Asset – Salvage Cost) multiplied by Depreciation Rate(As Adjusted)

or

Depreciation Per Annum = (Cost of Asset – Salvage Cost) divided by Useful Life

Determine the asset’s initial cost at the moment of purchase.

Determine the asset’s salvage value, or the price at which it may be sold or disposed of after its usable life has expired.

Straight Line Method of Depreciation: Example

Assume a company has spent $20,000 on a machine. The machine’s usable life is predicted to be 10 years, with a salvage value of $4,000, according to the researchers.

Cost of the asset = $20,000

Salvage Value = $4000

Total Depreciation Cost = Cost of asset – Salvage Value = 20000 – 4000 = $ 16000

The useful life of Asset = 10 years

Thus, annual depreciation cost = (Cost of asset – Salvage Cost)/Useful Life = 16000/10 = $ 1600

As a result, the company will depreciate the equipment at a rate of $1600 per year for the next 10 years.

Advantages of Straight Line Method

1. It is the simplest technique for calculating an asset’s depreciation.
2. The total amount due under this expenditure is simple to compute simply calculating the annual depreciation by the couple of years the asset has been in use.
3. In terms of the amount of depreciation, there is consistency. On a yearly basis, this sum is deducted from the Profit and Loss Account.
4. For assets with a lower value, this strategy is useful.
5. This technique of estimating depreciation is suitable for determining the estimated life of assets that are in regular use.

Disadvantages of Straight Line Method

1. The estimation of usable life is based on the probability that it may work till the estimated date, which is one of the most evident drawbacks of this technique.
2. The asset is subjected to greater repairs and maintenance costs than in the beginning. However, because the depreciation charge is the same for all years, the asset is put under unnecessary stress.
3. This strategy is ineffective for assets like plants, machinery, or structures, where additions and expansions are regular.

Conclusion

Due to factors such as wear and tear or obsolescence, the Straight Line Method of Depreciation assists businesses in lowering the book value of their fixed assets. This strategy should be used by businesses depending on its appropriateness for their assets. You can easily determine the expenditure of any fixed asset in your organisation using the straight-line depreciation approach. You can lower the value of a physical item by using straight-line depreciation. You may then take advantage of the depreciation during tax season.