Straight Line Depreciation Method or Original Cost Method

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Straight line depreciation method or original cost method is the simplest and most commonly used depreciation method. Under this method, the difference between the original cost of an asset and its estimated scrap value is calculated and then divided by the number of years in its estimated life. This method equally the cost of an asset in income statement over its useful life.

Formula:

The formula for calculating annual depreciation is as follows:

straight line depreciation method

Solved Example 1:

A machine has an estimated life of 5 years costing $50000 and has a residual/scrap value of $10000 at the end of its life.

Required:

Calculate annual depreciation charge under original cost method.

Solution:

straight line depreciation method example 1

Though the formula given above is used to calculate annual depreciation but it is fairly common to express straight line depreciation as a percentage of the original cost of the asset. For instance, if an asset cost $12000 and depreciation is to be calculated at 20% on cost, this would mean that we should charge $2400 ($12000 x 20%) as the annual depreciation for each year of the asset’s life.

Solved Example 2:

A business purchased a building at a cost of $100000. It was decided to depreciate the building at annual rate of 5% on the cost of the building.

Required:

Calculate annual depreciation charge under original cost method.

Solution:

straight line depreciation method example 2