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It is the simplest method of charging depreciation. The original cost of the asset is divided by the estimated life period of the asset. For example, if the value of asset is $ 20,000 and its useful life is estimated to be 10 years, the amount of depreciation to be charged every year will be $ 2,000 i.e.,20,000/10. Depreciation to be charged every year will be $ 2,000 or in other words, it will be fixed at $ 2,000 for every year.


If we draw a graph of depreciation of l0 years, we shall find it to be a straight line because depreciation every year is the same i.e., $ 2,000.

In certain cases, we are also given the scrap or residual value of the assets. The term residual or scrap value means the amount realized from the sale of obsolete asset.


In these cases, we use the following formula for the calculation of depreciation :


Annual depreciation =

Under straight line method, depreciation may also be determined by applying a fixed rate to the original cost of the asset.


Explanation of Formula


Cost of the assets. Cost of the assets means the original cost or the historical cost of the asset. The cost includes the purchase price and the expenses incurred in acquiring (carriage, cartage, freight on newly purchased asset), installation charge (in case of fixtures, plant and machinery) construction charges (in case of building).


Scrap or residual or breakup or salvage value. The asset being used will definitely become obsolete sooner or later. The asset can be disposed off, even if it is obsolete (useless) as a scrap. The amount fetched by scrapped asset is known as its residual value.


Estimated life of the asset. Whenever asset is acquired, the manufacturer generally mentions the estimated working life of the asset. It may be in years, months, days or hours (in case of machines and equipments) in tons (in case of coal mines) in kilometres (in case of truck) so on. If the estimated life is not mentioned by the manufacturer we can assume it on the basis of our past experience or any scientific method.