The straight Line Depreciation Method is one of the most popular and easy methods of charging depreciation on fixed assets. Under this method, depreciation is charged on the original cost of the asset every year, at a fixed rate of percentage. Therefore, in this case, the amount of depreciation remains the same for each of the years. This method of depreciation is also known as the Original Cost Method or Equal /Fixed Instalment Method.
Under this method, the amount to be written off each year as depreciation is calculated by dividing the cost of the asset by its estimated useful life. It should be noted that the scrap value of the asset is to be deducted from the original cost before calculating depreciation. The given below is the formula for calculating depreciation under this method.
For example, the cost of machinery purchased is Rs 4,70,000, and the installation cost is Rs 30,000. The scrap value at the end of its estimated life of 10 years is expected to be Rs 50,000. In this case, the amount to be written off each year as depreciation is calculated as follows
Advantages of Straight Line Method
The given below are the various advantages of the Straight Line Method of depreciation.
- It is a simple and easy method of calculating depreciation.
- Under this method, assets can be completely written-off. That is, an asset can be depreciated to its net scrap value or zero value.
- As under this method, the same or equal amount of depreciation is charged from the Profit and Loss Account each year, so, the burden of depreciation on the net profit remains the same.
- It is suitable for those assets that have low repairs and maintenance costs and are used continuously in the business over a period of time.
Disadvantages of Straight Line Method
The disadvantages of the Straight Line Method of depreciation are given below.
- When the assets have been in use for a long time, it demands frequent repairs and maintenance. Thus, with the passage of time, the burden of depreciation on profit and loss accounts increases along with the repairs and maintenance costs of the asset.
- Under this method, the value of the asset becomes zero in the books even if the asset is still in usable condition by the business.
- The estimation of the scrap value of the asset after a long period of say, 10 or 15 years, is a difficult task.
- This method is not suitable for all kinds of fixed assets.
accounting information is often defined as data and facts produced or revealed by the financial statements of a business. This information is usually available within the sort of financial statements, financial reports, etc.
Petty Cash Book is a book that records a large number of small payments such as conveyance, cartage, postage, telegram, and other expenses.