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Straight Line Method

(Fixed Or Equal Installment Method)

This method assumes that depreciation is a function of time rather than use in the sense that each accounting period receives the same benefit from using the asset as every other period. It is called straight line because it allocates an equal amount of depreciation in each of the accounting periods of the service life of the asset. The depreciation charge for each accounting period is therefore not affected by the extent of use of the asset, its age or efficiency. The formula for calculating depreciation charge for each accounting period as:

Annual Depreciation = Acquisition Cost – Estimated Salvage Value
                                                        Estimated Life in Years

    D = C   -   S        and        r = D x 100
                 N                                 C

For example, if a machine is purchased for Rs. 1,00,000 on January 1st and the installation charges are Rs. 30,000 with an estimated scrap value of Rs. 10,000 and estimated life of 5 years, the annual deprecation charge on 31st December would be found as under:

    D = Rs. 1,00,000 + Rs. 30,000 – Rs. 10,000         =  1,20,000    = Rs. 24,000
                                      5                                                       5       

If the asset were acquired at the start of the accounting period, the full amount of annual depreciation, i.e., Rs. 24,000 would be recognized i.e., credited to asset account. However, if the asset is acquired during the year, the amount of deprecation would be proportionate to the period of use.

        R =      24,000   x 100 = 18.46%

The book value of the machine is found by deducting the accumulated depreciation to date from the cost. At the end of first year, the book value of the machine, using the same figures, would be
 Book Value     =     C – (nxD)
                  =    1,30,000 = - (1x24,000)
                  =    1,30,000 – 24,000 = Rs. 1,06,000

Advantages: The following points may listed in favour of this method: (i) The strongest appeal for this method is its simplicity. Mathematical calculations are ignored. (ii) It is claimed that this method realistically matches cost and revenues. This method has smoothening effect on the income determination of each accounting period. (iii) There is no change either in the rate or the amount of depreciation over the useful economic life of the asset. Such a procedure provides for improve comparability.
Disadvantages: (i) It ignores the cost of capital. (ii) It is illogical because depreciation is considered a function of time rather than a function of use which often is not the case. (iii) It is based on the wrong assumption of equal utility of the asset during its useful life. (iv) The maintenance of the asset is generally costly in the later years with the result that deduction form the revenues – represented by maintenance costs and depreciation – would be greater in later years than in the earlier year.
Suitability: This method is suited in the following cases: (i) where the useful life of the asset can be estimated accurately in the sense that fall in economic service potential is more of less same each period. (ii) when repairs/maintenance expenses are uniform  for each accounting period. (iii) where use of the asset is consistent from period to period and therefore revenues tend to be constant so that each period benefits equally from the use of the asset, and (iv) where the asset is not susceptible to obsolescence.

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