Straight Line Depreciation Method

Deprecation refers to decline in the value of an asset over a period of time, deprecation can be calculated using many methods and straight line deprecation method is one of them. Straight line of method of depreciation refers to a method of depreciation under which deprecation is calculated using a predetermined formula which is – Acquisition Price of Asset – Scrap Value/Estimated Useful Life of Asset

Under this method of depreciation the amount of depreciation remains fixed and it and at the end of useful life of machine the value of machine becomes zero. For example suppose the acquisition price of the asset is $10000 and estimated scrap value of asset is $2000 and useful life of the asset is 4 years then deprecation charged per year will be ($10000-$2000/4 years) $2000 for next 4 years.

This method of deprecation has certain advantages like it is easy to use and understand as the calculation of depreciation is easy and also since under this method of deprecation same amount is charged as depreciation, it becomes easier for a company to compare the profits of the company. However this method of depreciation has some disadvantages also like this method cannot be used for those machines where it is difficult to estimate the useful life of the machines. Another disadvantage of using this method is that it does not take into account that efficiency of machine decreases as the time passes, since it charges same amount of deprecation every year.

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