Explanation

Straight line depreciation method charges cost evenly throughout the useful life of a fixed asset.
This depreciation method is appropriate where economic benefits from an asset are expected to be
realized evenly over its useful life.
Straight line method is also convenient to use where no reliable estimate can be made regarding
the pattern of economic benefits expected to be derived over an asset's useful life.

Formula
Straight line depreciation can be calculated using any of the following formulas:

Depreciation per annum

Depreciation per annum

( Cost Residual Value )

Useful Life

( Cost Residual Value ) x Rate of depreciation

Where:

Cost is the initial acquisition or construction costs related to the asset as well as
any subsequent capital expenditure.

Residual Value, also known as its scrap value, is the estimated proceeds expected from the

disposal of an asset at the end of its useful life. The portion of an asset's cost equal to residual
value is not depreciated because it is expected to be recovered at the end of an asset's useful
life.

Useful Life is the estimated time period that the asset is expected to be used starting from the
date it is available for useup to the date of its disposal or termination of use. Useful life is
normally expressed in units of years or months.

Rate of depreciation is the percentage of useful life that is consumed in a single accounting
period. Rate of depreciation can be calculated as follows:

Rate of depreciation

1
Useful Life

e.g. rate of depreciation of an asset having a useful life of 8 years is 12.5% p.a.

1
8
Tip

100%x = 12.5% per year

100%x

Remember to adjust the depreciation expense downwards when an asset has been acquired or disposed
off duringthe accounting period to avoid charging depreciation for the time the asset was not available for
use. See Example 1

Example 1
A fixed asset having a useful life of 3 years is purchased on 1 January 2013.
Cost of the asset is $2,000 whereas its residual value is expected to be $500.
Calculate depreciation expense for the years ending 30 June 2013 and 30 June 2014.

Depreciation expense per annum shall be:

($2000 $500)

3 Years

$500 p.a.=

Depreciation expense for the year ended 30 June 2013:

$500 x 6/12 = $250
As $500 calculated above represents the depreciation cost for 12 months, it has been reduced to 6
months equivalent to reflect the number of months the asset was actually available for use.

Depreciation expense for the year ended 30 June 2014:

$500 x 12/12 = $500
As the asset was available for the whole period, the annual depreciation expense is not apportioned.

Alternatively, you may express useful life in months and calculate depreciation charge as follows:
Useful life in months
=
12 x 3
= 36 months
Monthly depreciation charge

($2000 $500)
36 months

Depreciation expense for year ended 30 June 2013

$41.67 x 6

= $250

Depreciation expense for year ended 30 June 2014

$41.67 x 12

= $500

= $41.67 p.m.

Revision in Estimates of Useful life and Residual Value

The estimates of useful life or residual value of an asset may need to be revised in subsequent
accounting periods in order to reflect more accurately the pattern of economic benefits in light of new
information.
In such cases, it will be necessary to account for the effects of revision in estimates prospectively, i.e. the
change in depreciation expense is accounted for in the period in which the revision takes place and
subsequent accounting periods (see Example 2 below).
Following formula can be used to calculate straight line depreciation for the current and subsequent
accounting periods in case of a revision:

 Depreciation expense

( Cost - Revised Residual Value - Accumulated Depreciation)

Revised Remaining Useful Life

Where:

Accumulated depreciation is the total depreciation that has been charged in previous
accounting periods since the capitalization of the asset.

Revised remaining useful life is the estimated number of useful years or months of the asset
remaining since the last accounting period in which depreciation was charged.

Tip
Depreciation already charged in prior periods is not revised in case of a revision in the depreciation
charge due to a change in estimates.
Refer IAS 8 for treatment of changes in accounting estimates.

Example 2
A fixed asset is purchased on 1 January 2011.
Information relating to the asset is as follows:
Cost of acquisition
Residual Value estimated at the time of acquisition
Residual Value revised estimate on 1 January 2012
Useful Life estimated at the time of acquisition
Useful Life revised estimate on 1 January 2013
Calculate depreciation expense for the years ended 31 December 2011, 2012, 2013 & 2014

2011Depreciation expense

$110,000*- $10,000**
10 Years***

$110,000
$10,000
Nil
10 years
8 years

$10,000.=

*Cost
**Residual Value
***Useful Life
2012Depreciation expense

$110,000 - $0* - $10,000**

9 Years***

$11,111.=

*Residual Value (revised)

**Depreciation charged in the year 2011.
***Remaining Useful Life. Since depreciation for only 1 year has been charged so far, remaining useful
life is equal to 9 years (10 - 1)
2013Depreciation expense

$110,000 - $0 - $10,000 - $11,111*

6 Years***

$14,815.=

* Depreciation charged in the year 2012.

** Remaining Useful Life (revised). The revised estimate of useful life is 8 years. As depreciation has
been charged for 2 years, the remaining useful life relevant to depreciation calculation is 6 years.

2014 $14,815* = Depreciation expense

* Depreciation for the year 2014 is equal to the depreciation expense charged in the year 2013 because
there has been no change in estimates since then.
- See more at: http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/straightline.html#sthash.UWPOCdpq.dpuf

Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of a
Depreciation is a process of allocation.
Cost to be allocated = acquisition cot - salvage value
Allocated over the estimated useful life of assets.
Allocation method should be systematic and rational.

Depreciation Methods

Depreciation methods based on time

Straight line method
Declining balance method
Sum-of-the-years'-digits method
Depreciation based on use (activity)

Straight Line Depreciation Method

Depreciation = (Cost - Residual value) / Useful life

[Example, Straight line depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is est
have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Com
recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 a
using straight line depreciation method.
Depreciation for 2011
= ($140,000 - $20,000) x 1/5 x 9/12 = $18,000
Depreciation for 2012
= ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

Depreciation for 2013

= ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

Declining Balance Depreciation Method

Depreciation = Book value x Depreciation rate

Book value = Cost - Accumulated depreciation
Depreciation rate for double declining balance method
= Straight line depreciation rate x 200%
Depreciation rate for 150% declining balance method
= Straight line depreciation rate x 150%
[Example, Double declining balance depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is est
have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Com
recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 a
using double declining balance depreciation method.
Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year
Depreciation rate for double declining balance method
= 20% x 200% = 20% x 2 = 40% per year
Depreciation for 2011
= $140,000 x 40% x 9/12 = $42,000
Depreciation for 2012
= ($140,000 - $42,000) x 40% x 12/12 = $39,200
Depreciation for 2013
= ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520
Double Declining Balance Depreciation Method

Year

Book Value
at the beginning

Depreciation Rate

Depreciation Expense

Book Value at t
year-end

2011

$140,000

40%

$42,000 (*1)

$98,000

2012

$98,000

40%

$39,200 (*2)

$58,800

2013

$58,800

40%

$23,520 (*3)

$35,280

2014

$35,280

40%

$14,112 (*4)

$21,168

2015
(*1)
(*2)
(*3)
(*4)
(*5)

$21,168

$140,000 x 40% x 9/12

$98,000 x 40% x 12/12
$58,800 x 40% x 12/12
$35,280 x 40% x 12/12
$21,168 x 40% x 12/12

=
=
=
=
=

40%

$1,168 (*5)

$20,000

$42,000
$39,200
$23,520
$14,112
$8,467

--> Depreciation for 2015 is $1,168 to keep book value same as salvage value.
--> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.)

[Example, 150% declining balance depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is est
have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Com
recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 a
using double declining balance depreciation method.
Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year
Depreciation rate for double declining balance method
= 20% x 150% = 20% x 1.5 = 30% per year
Depreciation for 2011
= $140,000 x 30% x 9/12 = $31,500
Depreciation for 2012
= ($140,000 - $31,500) x 30% x 12/12 = $32,550
Depreciation for 2013
= ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785
150% Declining Balance Depreciation Method

Year

Book Value
at the beginning

Depreciation Rate

Depreciation Expense

Book Value at t
year-end

2011

$140,000

30%

$31,500 (*1)

$108,500

2012

$108,500

30%

$32,550 (*2)

$75,950

2013

$75.950

30%

$22,785 (*3)

$53,165

2014

$53,165

30%

$15,950 (*4)

$37,216

2015

$37,216

30%

$11,165 (*5)

$26,051

2016

$26,051

30%

$6,051 (*6)

$20,000

(*1)
(*2)
(*3)
(*4)
(*5)
(*6)

$140,000 x 30% x 9/12 = $31,500

$108,500 x 30% x 12/12 = $32,550
$75,950 x 30% x 12/12 = $22,785
$53,165 x 30% x 12/12 = $15,950
$37,216 x 30% x 12/12 = $11,165
$26,051 x 30% x 12/12 = $7,815
--> Depreciation for 2016 is $6,051 to keep book value same as salvage value.
--> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)

Sum-of-the-years'-digits method

Depreciation expense = (Cost - Salvage value) x Fraction

Fraction for the first year = n / (1+2+3+...+ n)
Fraction for the second year = (n-1) / (1+2+3+...+ n)
Fraction for the third year = (n-2) / (1+2+3+...+ n)
...
Fraction for the last year = 1 / (1+2+3+...+ n)
n represents the number of years for useful life.

[Example, Sum-of-the-years-digits method]

Company A purchased the following asset on January 1, 2011.
What is the amount of depreciation expense for the year ended December 31, 2011?
Acquisition cost of the asset --> $100,000
Useful life of the asset --> 5 years
Residual value (or salvage value) at the end of useful life --> $10,000
Depreciation method --> sum-of-the-years'-digits method
Calculation of depreciation expense
Sum of the years' digits = 1+2+3+4+5 = 15
Depreciation for 2011 = ($100,000 - $10,000)
Depreciation for 2012 = ($100,000 - $10,000)
Depreciation for 2013 = ($100,000 - $10,000)
Depreciation for 2014 = ($100,000 - $10,000)
Depreciation for 2015 = ($100,000 - $10,000)

x
x
x
x
x

5/15
4/15
3/15
2/15
1/15

=
=
=
=
=

$30,000
$24,000
$18,000
$12,000
$6,000

Sum of the years' digits for n years

= 1 + 2 + 3 + ...... + (n-1) + n = (n+1) x (n / 2)
Sum of the years' digits for 500 years
= 1 + 2 + 3 + ...... + 499 + 500
= (500 + 1) x (500 / 2) = (501 x 500) / 2 = 125,250