Straight Line method
This method makes provision for equal amount to be charged as depreciation for each year of useful life. It is calculated by thus; cost of asset less residual value divided by the number estimated as the useful life span. It is said to be the easiest to calculate, and consists of depreciating the value of an asset in equal installments over the cost of its useful life. In order to calculate straight-line depreciation, you’ll need the following information:
- The asset’s initial cost
- The salvage value (It’s estimated value at the end of its useful life)
- The useful lifespan, in years
First, divide the number one by the useful life to get the annual depreciation rate:
Next, subtract the salvage value from the initial cost to find the depreciable cost:
Finally, multiply the annual depreciation rate by the depreciable cost to arrive at the annual straight-line depreciation amount.
For example, let’s say that your business buys a piece of equipment for N20,000 with a useful life of 10 years and an expected salvage value of N4,000. We can calculate the annual depreciation rate to be 0.1, or 10%, and the depreciable cost to be the difference between N20,000 and N4,000, or N16,000. Therefore, the annual depreciation is:
Annual depreciation= N16,000 x 0.1= N1,600…
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SS1 Financial Accounting Third Term: Straight Line and Reducing Balance Methods of Depreciation
