Straight Line Depreciation Formula (Table of Contents)
- Straight Line Depreciation Formula
- Examples of Straight Line Depreciation Formula (With Excel Template)
- Straight Line Depreciation Formula Calculator
Straight Line Depreciation Formula
The straight Line Method (SLM) is one of the easiest and most commonly used methods for providing depreciation. The formula for calculating Straight Line Depreciation is:
- Cost of Asset: Actual cost of Acquisition of an Asset, after considering all the direct expenses related to acquiring of asset, borrowing cost, and any directly attributable cost to bringing the asset to its present condition and location, like Freight, Insurance, and Taxes.
- Salvage Value: Salvage Value of asset means the expected realizable value of an asset at the end of its useful life. It is also called Residual Value.
- Useful Life of Asset: The Time period during which the asset can be used. After the end of useful life, the value of the asset becomes zero.
Examples of Straight Line Depreciation Formula (With Excel Template)
Let’s take an example to understand the calculation of the Straight Line Depreciation formula.
Straight Line Depreciation Formula – Example #1
ABC Inc. purchased a boiler plant for Rs.800000. The useful life of the plant is 10 years. The plant can be sold at Rs.50000 at the end of 10 years. Calculate the depreciation to be charged each year using the Straight Line Method.
Depreciation Per Year is calculated using the below formula
Depreciation Per Year = (Cost of Asset – Salvage Value) / Useful Life of Asset
- Depreciation to be charged each year= (800000-50000)/10
- Depreciation to be charged each year = Rs.75000
Fixed Asset Chart:
Straight Line Depreciation Formula – Example #2
We take an example of Reliance Industries Ltd. Reliance uses the Straight Line Method of charging Depreciation for its certain assets from Refining Segment and Petrochemical Segment and SEZ Unit/ Developer. The extract of which can be seen in the below image from Audit Report of Reliance:
RIL purchased an Oil Refinery machine for Rs.50 lacs on 01/04/2016. RIL is expected to use this machinery for 20 years; after that Machine will be scrapped and will not have any residual value.
Depreciation Per Year is calculated using the below formula
Depreciation Per Year = (Cost of Asset – Salvage Value) / Useful Life of Asset
- Depreciation to be charged each year= (5000000-0)/20
- Depreciation to be charged each year = Rs.250000
In such a case, RIL will charge Depreciation of Rs.250000 each year, starting from the Year 2016-17 till 2035-36. At the end of 31st March 2036, the full amount of the Machine will be depreciated, and it will have NIL value.
Straight Line Depreciation Formula – Example #3
Another example of using the straight-line method of depreciation can be seen from the Financial Statements of Larsen & Toubro (L&T). L&T also provides depreciation on its assets using SLM. The extract of the annual report of L&T is inserted below:
L&T purchased 5 Cement Plants for undertaking a capital expenditure on the construction of Roads at a cost price of Rs.600000 each. It paid Rs.50000 for the freight to bring the plants to the construction site. It further incurred Rs.100000 to bring these plants to their working conditions. Plants will have a useful life of 10 years, after which they can be sold for Rs.10000 each.
The total cost of All Plants is calculated as
- Actual cost of 5 Plants= Rs. (600000*5) + 50000+ 100000
- Actual cost of 5 Plants = 3150000
Depreciable Value of Plants is calculated as:
- Depreciable Value of Plants = 3150000 – (10000 * 5)
- Depreciable Value of Plants = Rs.3100000
Depreciation Per Year is calculated as:
- Depreciation Per Year = (3100000/10)
- Depreciation Per Year = Rs.310000
Carrying Value at the end of Year 1 is calculated as:
- Book Value at the end of Year 1 = (3150000 – 310000)
- Book Value at the end of Year 1 = Rs.2840000
Suppose now in Year 2; Management estimates the remaining useful life of plants to be 8 years and Residual Value to be Rs. 40000.
In this case, revised depreciation will be:
- Revised Depreciable Amount = Rs. (2840000-40000)
- Revised Depreciable Amount = Rs.2800000
Revised Depreciable Amount of Plants at the end of Year 2 is Rs.2800000
Depreciation for year 2 is calculated as:
- Depreciation for Year 2 = (2800000/8)
- Depreciation for Year 2 = Rs.350000
Depreciation to be charged from Year 2 onwards is Rs.350000
In this way, we can conclude that with the revision in estimates of the useful life of assets and Residual Value, the Depreciation amount also gets revised, keeping the amount to be charged as depreciation constant every year.
Explanation of Straight Line Depreciation Formula
Straight Line Depreciation Formula allocates the Depreciable amount of an asset over its useful life in equal proportion. The straight Line Depreciation formula assumes that the benefit from the asset will be derived evenly over its useful life. At the end of the useful life of an asset, the value of the asset becomes zero or equal to the realizable value. This method depreciates the asset in a straight downward sloping line.
The salvage value or Residual value of the asset is deducted from the purchase price of the asset to assess the depreciable value of the asset. This salvage value is an estimation of an amount that will be earned when the asset is sold at the end of its useful life. Salvage value is estimated every year. If there is a change in the estimation of value, the corresponding effect is reflected in the depreciable amount and so in depreciation too.
Relevance and Uses
Straight-line depreciation is an accounting method that is most useful for getting a more realistic view of profit margins in businesses primarily using long-term assets. These types of assets include office buildings, manufacturing equipment, computers, office furniture, and vehicles. These are considered long-term assets because they will last for more than one year and are necessary to run the business on a day-to-day basis. This method evens out the profits and expenses at an equal rate, using the straight-line depreciation method.
Straight Line Depreciation Method is a highly recommended method as it is the easiest method for calculating Depreciation. It is less prone to calculation error risk as it does not involve complex calculations and data. It also does not cause variation in the Profit and Loss Statement of each year as Depreciation is provided uniformly over its useful life.
Straight Line Depreciation Formula Calculator
You can use the following Straight Line Depreciation Calculator.
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| Depreciation Per Year = | |
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