Straight Line Method of Depreciation

Definition

The Straight Line Method (SLM) of Depreciation reduces the value of an asset consistently till it reaches its scrap value. A fixed amount of depreciation gets deducted from the value of the asset on an annual basis. You can get the depreciation amount using the below formula:

(Original Cost – Estimated Scrap Value) / Estimated Useful Life

Where:

Original Cost – Purchase price of the asset

Estimated Scrap Value – Asset’s value at the conclusion of its useful life

Estimated Useful Life – No. of years that the asset can be of use.

Merits:

The merits of using the Straight Line Method to calculate depreciation are as follows:

  • It is the easiest method to compute the depreciation of an asset.
  • The Straight Line Method can reduce the Asset value to Zero or Net Scrap Value by following this method.
  • The total amount to be charged under this expense is easy to calculate by multiplying the yearly depreciation by the number of years of the asset’s usage.
  • There is uniformity in terms of the depreciation amount. This amount gets reduced from the Profit and Loss Account on an annual basis.
  • This method is helpful for assets of smaller value.
  • Comparison of profits between years becomes more straightforward because the depreciation amount charged remains the same every year.
  • This method of calculating depreciation is best for assets under regular use to determine their expected life.

Demerits:

The demerits of using the Straight Line Method to calculate depreciation are as follows:

  • The asset bears more repairs and maintenance charges in the final years of its life than the initial years. But since the depreciation charge is equal for all years, it puts undue pressure on the asset.
  • There is no provision to replace the asset under the Straight Line Method and it is up to the firm to arrange funds for that purpose.
  • The decision to depreciate the asset on its original cost is not prudent when its value declines every year.
  • This method is not helpful for assets where additions and expansions like plants, machinery, or buildings are possible.

Comparison with Written Down Value method:

The Straight Line Method is often compared with the Written Down Value (WDV) method to determine which one is more suited to an individual’s business. The main points of difference between them are as follows:

Straight Line Method

Written Down Value Method

Definition

The Straight Line method calculates a fixed amount that gets depreciated every year.

The Written Down Value method calculates depreciation by charging a fixed interest rate every year.

Rate of Depreciation

The rate of depreciation under this method differs every year.

The rate of depreciation is constant under this method.

Asset Value

The Asset value can become zero under the Straight Line method

The Asset value can never become zero under the Written Down Value method

Annual Depreciation Charges

The annual charges remain fixed during the asset’s life.

The annual charges reduce every year.

Depreciation Amount

The amount charged under depreciation is lower in the initial years.

The amount charged under depreciation is higher in the initial years.

Conclusion

The Straight Line Method of Depreciation helps firms decrease the book value of their fixed assets due to reasons like wear and tear or obsolescence. Businesses should use this method based on its suitability to their assets.

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