This is the most simple method of depreciating the fixed asset. Here, we split the cost of the fixed asset over the useful life which results in equal depreciation expense charged every year. The formula to calculate depreciation is as follows:
Straight Line Method Formula
Annual Depreciation = (Cost – Residual value) / Estimated useful life of the fixed asset
Where:
Cost = Purchase price + Taxes + Import Duties + Transportation Charges + Installation Charges
Residual value = The value of the asset after the expiry of the useful life
Useful life = The number of years for which asset can be used.
Journal Entry
| Depreciation Expense | Debit | |
| Accumulated Depreciation | Credit |
Example Question
Adam and Boon buys a vehicle on 1st January 2012 with a total cost of 360,000. The estimated residual value of the vehicle is 14,400 and it has usefullife of 05 years. The company uses straight line method to depreciate the vehicle. The company accounting years ends on 31st Dec.
Required:
Calculate depreciation expense for first 03 years.
Prepare partialbalance sheet as on 31st Dec, 2014.
Answer
Using formula:
Annual Depreciation = (Cost – Residual value) / Estimated useful life of the fixed asset = (360,000 – 14,400) / 5 = 69,120
| Year | (Cost – Accumulated depreciation) x % | Depreciation expense | Accumulated depreciation |
| 2012 | (360,000 – 0) | 69,120 | 69,120 |
| 2013 | (360,000 – 69,120) | 69,120 | 138,240 |
| 2014 | (360,000 – 138,240) | 69,120 | 207,360 |
Adam & Boons
Balance Sheet (Partial)
As on 31st Dec 2014
| Vehcile at cost | 360,000 |
| Accumulated depreciation | (207,360) |
| Vechile- book value | 152,640 |
Example 2
James & Co purchased a machine on 1st July, 2011 at a price of $ 200,000. The terms of payment is 2/10 n30. The company has to incur the additional expenses to acquire the machinery which are as follows:
Freight expenses $ 24,000
Sales tax 15 %
Installation expenses $ 8,000
Transportation expenses $ 3.000
Transportation expenses were paid to deliver machinery from the railway station to the factory.
It is estimated that the useful life of the asset would be 10 years with a residual value of 10,000. The management decided to use the straight line method for depreciating the machinery. The accounting year of James ends on 31st December.
Required
- Calculate the cost of the machine and pass the journal entries to record the transactions for the acquisition of the asset.
- Calculate the amount of the yearly depreciation expense.
- Calculate the depreciation expense and accumulated depreciation for 2011, 2012 & 2013.
- Journalize the entries to record the depreciation expense for 2011, 2012 & 2013.
- Prepare the abstract balance sheet as at 31st December, 2011, 2012 & 2013.
Solution
Cost of machine
Price of the machine 200,000
Cash discount (200,000 x 2 %) (4,000)
Cash price 196,000
Add: Expenses
Sales tax (196,000 x 15 %) 29,400
Freight charges 25,000
Installation charges 8,000
Transportation expenses 3,000 65,400
Total cost of the asset – machinery 130,600
James & Co.
General Journal Entries
| Description | Debit | Credit |
| In order to record the purchase of the machinery, this entry would be passed: | ||
| Machine | 196,000 | |
| Cash | 196,000 | |
| To record the initial expenses incurred on acquisition of the machinery, this entry will be passed: | ||
| Freight charges | 25,000 | |
| Installation expenses | 8,000 | |
| Sales tax | 29,400 | |
| Transportation expenses | 3,000 | |
| Cash | 65,400 | |
| In order to transfer the initial expenses to the machine account, this entry will be recorded: | ||
| Machine | 65,400 | |
| Freight charges | 25,000 | |
| Installation expenses | 8,000 | |
| Sales tax | 29,400 | |
| Transportation expenses | 3,000 |
- Annual Depreciation
Annual depreciation expenses = ( Cost – Residual value ) / estimated useful life = (130,600 – 10,000) / 10 = $ 12,060 per year
iii. Depreciation & Accumulated Depreciation
| Depreciation expense | Accumulated Depreciation | ||
| Dec 31, 2011 | = 12,060 x (6/12) | 6,030 | 6,030 |
| Dec 31, 2012 | 12,060 | 18,090 | |
| Dec 31, 2013 | 12,060 | 30,150 |
James & Co.
Journal Entries Depreciation Expense
| Date | Description | Debit | Credit |
| 31.12.2011 | Depreciation expense | 6,030 | |
| Allowance for depreciation | 6,030 | ||
| 31.12.2012 | Depreciation expense | 12,060 | |
| Allowance for depreciation | 12,060 | ||
| 31.12.2013 | Depreciation expense | 12,060 | |
| Allowance for depreciation | 12,060 |
James & Co.
Balance Sheet (Abstract)
As at 31st December,
| 2011 | 2012 | 2013 | |
| Machine – total cost | 130,600 | 130,600 | 130,600 |
| Less: Accumulated depreciation | (6,030) | (18,090) | (30,150) |
| Book value of the machine | 124,570 | 112,510 | 100,450 |