Depreciation Definition:
In the field of accounting and economics, the term depreciation refers to a periodical decrease in the value of a tangible or intangible property. This depreciation can be derived from three main reasons: the wear and tear due to use, the passage of time and old age.
What is Straight line depreciation?
Straight line depreciation method allows an organization to allocate the same expense over the useful life of a tangible resource. The useful life refers to the number of years or accounting periods that a company expects to use the asset in the operating activities or manufacturing processes.
Straight line Depreciation
It is one of the most used methods of depreciation. It remains the same for all years of the asset’s useful life. It implies a constant depreciation based on time and not the use of assets. To calculate depreciation, the asset value is divided by its useful life. Depending on the type of property, the useful life of the property may vary.
- Properties: useful life of twenty years.
- Machinery and equipment: life span of ten years.
- Vehicles and computers: life span of five years.
Depreciation can be divided on a monthly or annual basis. It is also calculated what is known as the residual value/waste value; Value by which the asset can be sold once its useful life has ended.
Straight line depreciation method
The straight line method of depreciation is considered as a function of time and not of the use of the assets. It is a simple method that is being widely used and is based on considering progressive obsolescence as the prime cause of a limited service life, and therefore consider the decrease of such utility steadily over time. The depreciation charge will be equal to cost less the value of waste.
Straight line depreciation Formula:
The formula for computing annual straight line depreciation is as follow;
| Cost – waste value | – | Amount of depreciation for each year of the asset’s life or annual depreciation expense
|
| 5 years |
Straight line depreciation Example
To calculate the depreciation cost of a harvester of 22,000 dollars that will be used approximately for 5 years and whose waste value is 2,000 dollars, using this straight line method we obtain:
| $ 22,000 – $ 2,000 | = | Annual depreciation expense of $ 4,000 |
| 5 years |
This method distributes the expense in an equitable way so that the amount of depreciation is the same for each fiscal period.
Another example of straight line method when no residual value;
A tire manufacturer that acquires new equipment worth US $ 1 million. The accounting manager of the company believes that the asset is a five-year resource and wants to depreciate the value through a straight-line method. As a result, the annual depreciation expense is US $ 200,000 (US $ 1,000,000 divided by 5). At the end of the first year, the value of the asset in the books is US $ 800,000 (1 million minus US $ 200,000). At the end of the equipment life,
Now put the data in Straight line depreciation equation/formula;
| $ 1,000,000 | |
| 5 years | = Annual depreciation expense of $200,000 |
Straight line Depreciation Journal Entry:
After calculating the depreciation we have to record this journal entry
| Date | Account Name | Debit | Credit |
| 31 Dec | Depreciation Expense
To Accumulated Depreciation |
200,000 |
200,000 |
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