The Straight Line Method of Depreciation

We cover the Straight Line Method of Depreciation. This video defines this method, explains when we might use this method, gives the equation, and runs through an example.

The straight line method of depreciation means that:
Each year, the same depreciation charge is applied to the asset

The equation is given by Depreciation charge = (Cost − Residual Value)/(Useful Life)

Straight depreciation is charged to the accounts on a monthly basis.

Example

ABC Ltd purchases a machine for £1000 on 30 June 2021.
It estimates it will be able to sell the machine for £150 in 17 years.

What is the depreciation charge to be recognised in year ended 31 December 2021?

Annual Depreciation Charge = (Cost − Residual Value)/(Useful Life)

Annual Depreciation Charge = (1000 −150)/17

Annual Depreciation Charge = £50

Machine was purchased on 30 June
Therefore, only used for 6 months this year

Depreciation charge for 2021 = 50 x 6/12

= £25

Note that we need to apportion the depreciation if the asset was only owned for part of the year.

We also answer the question of 'when do you use the straight line method?' instead of using the reducing balance method. Additionally, we see what we do when an asset is purchased during a year, so we do not charge a full year of depreciation to the asset.

Check out the Accounting playlist for more videos like this!

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Видео The Straight Line Method of Depreciation канала Everything Econ