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Explain about straight line depreciation in accounting.
Straight line depreciation is the simple way to calculate depreciation. In this, a fixed amount is deducted from each accounting year of a firm. In straight line depreciation, firm depreciates equal amount from principle amount of an asset annually over its useful life. That means, every accounting year there will be change in asset value in balance sheet.
Formula
Straight line depreciation = (cost of the asset – salvage cost) * depreciation rate
Straight line depreciation = (cost of the asset – salvage value)/useful life of an asset
Straight line depreciation for partial years = D * (Number of months/12)
Where D is depreciation amount calculated annually
Steps to calculate straight line depreciation are as follows −
- Initial cost of the asset.
- Determine salvage value.
- Determine estimated life of the asset.
- Calculate estimated life annually.
- Multiple with depreciation rate by the (asset cost – salvage value).
Journal entry of straight line depreciation is as follows −
| Depreciation expenses | XXXXX | |
|---|---|---|
| Accumulated depreciation | XXXXX |
Some of the advantages are given below −
- Easy to calculate.
- Depreciation amount is fixed.
- Easy for small business.
- Asset depreciation up to zero or its scrap value.
- Easily applied to long term asset.
Some of the disadvantages are mentioned below −
- Depreciation is equal for all the years, in end life of asset, it can bear more expense which puts more pressure.
- No provision replacement.
- Interest loss.
- Time frame.
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