Straight Line Depreciation Method
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.
Straight line depreciation can be calculated using any of the following formulas:
Remember to adjust the depreciation expense downwards when an asset has been acquired or disposed off during the accounting period to avoid charging depreciation for the time the asset was not available for use. See 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)||= $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)||=||$41.67 p.m.|
|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|
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).
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.
A fixed asset is purchased on 1 January 2011.
Information relating to the asset is as follows:
|Cost of acquisition||$110,000|
|Residual Value estimated at the time of acquisition||$10,000|
|Residual Value revised estimate on 1 January 2012||Nil|
|Useful Life estimated at the time of acquisition||10 years|
|Useful Life revised estimate on 1 January 2013||8 years|
Calculate depreciation expense for the years ended 31 December 2011, 2012, 2013 & 2014
|2011 Depreciation expense||=||$110,000*- $10,000**||= $10,000.|
|2012 Depreciation expense||=||$110,000 - $0* - $10,000**||= $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)
|2013 Depreciation expense||=||$110,000 - $0 - $10,000 - $11,111*||= $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 Depreciation expense = $14,815*
* 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.