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Straight-line method

The most common depreciation method used to depreciate assets except land is the straight-line method. Under this method, the depreciation expense of an asset for each year is the same and this is arrived at by dividing the depreciable cost of the asset by the number of years of its useful life. The depreciable cost of an asset is its purchase price in addition to all costs necessary to make it functional such as installation and delivery costs less its estimated salvage value. An asset’s salvage value is its worth at the end of its productive life.


Calculation of depreciation expense under the straight-line depreciation is illustrated here:

$ $
Cost of asset 62,000 62,000
Less: estimated salvage value 2,000 -*
Depreciable cost** 60,000 60,000
Estimated useful life in years 5 5
Depreciation expense per year 12,000 12,000

*   No estimated salvage value. Entire cost of asset is to be depreciated.
** This is the cost to be depreciated over the estimated useful life of the asset.


The following table shows the yearly depreciation expense to be charged in the income statement as at 31st December:

$
20XX*** 3,000
20X1 12,000
20X2 12,000
20X3 12,000
20X4 12,000
20X5**** 9,000
Total 60,000

***   Motor vehicle purchased on 1st October 20XX (3 months/quarter of the year).
**** Total depreciation cannot exceed depreciable cost.


Following are journal entries for the above depreciation. These entries are then posted to the accounts in the ledger.

Date Accounts Folio Dr Cr
$ $
20XX
31st Dec Depreciation 3,000
Accumulated Depreciation 3,000
(Depreciation of motor vehicle)


Journal entries for 20X1 to 20X4 are the same except for the date

Date Accounts Folio Dr Cr



$ $
20(X1-X4)




31 Dec Depreciation
12,000

Accumulated Depreciation

12,000

(Depreciation of motor vehicle)



Date Accounts Folio Dr Cr



$ $
20X5




31 Dec Depreciation
9,000

Accumulated Depreciation

9,000

(Depreciation of motor vehicle)



If financial statements are prepared monthly, one of the monthly journal entries is as follow:

Date Accounts Folio Dr Cr



$ $
20X3




30 Sep Depreciation
1,000

Accumulated Depreciation

1,000

(Depreciation of motor vehicle)



Accounts in the general ledger:

Motor Vehicle Account

Date Particulars Folio Amount Date Particulars Folio Amount
$
20XX
1 Oct Bank~ 60,000

~ Asset is paid for by cash from a loan.


Accumulated Depreciation Account – Motor Vehicle

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX 20XX
31 Dec Balance c/d

3,000

31 Dec
Depreciation

3,000



3,000




3.000
20X1 20X1
01 Jan Balance b/d 3,000
31 Dec Balance c/d 15,000 31 Dec Depreciation 12,000
15,000 15,000
20X2
01 Jan Balance b/d 15,000


Accumulated Depreciation Account – Motor Vehicle (Year 20X5)

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20X5 20X5


01 Jan Balance b/d 51,000
31 Dec Balance c/d 60,000 31 Dec Depreciation 9,000
60,000 60,000
20X6
01 Jan Balance b/d 60,000

Last Updated (Friday, 03 September 2010 18:48)