Straight Line Method of Depreciation: Formula, Examples & Calculation

Straight Line Method of Depreciation

What Is the Straight Line Method of Depreciation?

Most students first encounter depreciation as a confusing end-of-year adjustment. Let me simplify it. When a business buys an asset — say a ₹1,20,000 delivery van — that van does not last forever. Over five years it loses value through wear and tear. The straight line method of depreciation (SLM) simply says: spread that loss equally, year by year, until the asset reaches its residual value.

According to the straight line method of providing depreciation, the depreciation charge remains constant every year. That is why this method is also called the fixed instalment method or the original cost method — because you always apply the rate to the original cost, never the written-down value.

Under the Companies Act 2013 (Schedule II), SLM is one of the two accepted methods for calculating depreciation in India. The other is the Written Down Value (WDV) method. SLM is widely preferred for assets that provide uniform benefit across years: office furniture, buildings, computers, and plant & machinery.

In This Guide

• What is the straight line method of depreciation?
• SLM formula and rate calculation
• Easy examples (beginner level)
• Moderate examples (intermediate)
• Nuanced examples (advanced)
• Journal entry for SLM depreciation
• SLM vs WDV method
• Advantages and limitations
• SLM under Companies Act 2013
• FAQs

Straight Line Method of Depreciation: Formula

There are two formulas you need to know. The first gives you the annual depreciation amount. The second gives you the depreciation rate.

Key terms explained simply:

• Cost of Asset — the total amount paid to acquire the asset including installation charges
• Salvage Value (Residual Value / Scrap Value) — the estimated amount the asset will fetch at the end of its useful life. Under Companies Act 2013, this should not exceed 5% of original cost
• Useful Life — how many years the asset is expected to be used productively

Notice that under the straight line method, land is excluded from depreciation. Land does not wear out, and its value does not diminish over time. Only tangible depreciable assets are subject to SLM.

🟢 Easy Examples: Straight Line Method of Depreciation (Beginner Level)

These examples use round numbers and no mid-year complications. Perfect for Class 11, Class 12, and CA Foundation students.

Example 1 — Computer Purchase

A business buys a computer for ₹60,000. Salvage value: ₹6,000. Useful life: 3 years.

Calculation: Depreciation = (60,000 − 6,000) ÷ 3 = ₹18,000 per year
Depreciation rate = (18,000 ÷ 60,000) × 100 = 30% p.a.

Example 2 — Office Furniture

A company purchases office furniture for ₹50,000. Scrap value: ₹5,000. Life: 5 years.

Depreciation per year = (50,000 − 5,000) ÷ 5 = ₹9,000
Rate = (9,000 ÷ 50,000) × 100 = 18% p.a.
The book value at end of Year 5 = ₹5,000 (the salvage value). Simple and clean.

Example 3 — No Scrap Value

A sole trader buys a printer for ₹24,000 with zero salvage value and a life of 4 years.

Depreciation = (24,000 − 0) ÷ 4 = ₹6,000 per year
Rate = (6,000 ÷ 24,000) × 100 = 25% p.a.
By end of Year 4, book value = ₹0. The asset is fully written off.

Example 4 — Finding the Rate Only

An asset costs ₹1,00,000. Residual value is ₹10,000. Life is 10 years. What is the depreciation rate?

Annual depreciation = (1,00,000 − 10,000) ÷ 10 = ₹9,000
Rate = (9,000 ÷ 1,00,000) × 100 = 9% per annum

Example 5 — Back-calculating Useful Life

A machine costs ₹80,000. Salvage value: ₹8,000. Annual depreciation charged: ₹7,200. What is the useful life?

Useful Life = (80,000 − 8,000) ÷ 7,200 = 72,000 ÷ 7,200 = 10 years

🟡 Moderate Examples: Straight Line Method of Depreciation (Intermediate Level)

These examples include mid-year purchases, additions to assets, and rate-based questions commonly seen in B.Com, IPCC, and competitive exams.

Example 6 — Machine Purchased Mid-Year (Time Apportionment)

A factory buys machinery on 1 October 2023 for ₹1,20,000. Salvage value: ₹12,000. Useful life: 6 years. Books close on 31 March each year. What is the depreciation for the year ending 31 March 2024?

Full-year depreciation = (1,20,000 − 12,000) ÷ 6 = ₹18,000
Asset held for 6 months (Oct to Mar)
Depreciation for the year = 18,000 × 6/12 = ₹9,000

Example 7 — Additional Installation Cost

A company buys a machine for ₹90,000. Installation charges: ₹10,000. Salvage value: ₹5,000. Useful life: 5 years.

Total cost = 90,000 + 10,000 = ₹1,00,000
Depreciation = (1,00,000 − 5,000) ÷ 5 = ₹19,000 per year

Common mistake to avoid: always include installation, freight, and trial-run costs as part of the asset's cost. Only the original/total cost goes into the formula.

Example 8 — Rate Given, Find Annual Depreciation

An asset has an original cost of ₹2,50,000. Depreciation is charged at 10% per annum on the straight line method. There is no scrap value. What is the depreciation each year, and what is the book value at end of Year 3?

Annual depreciation = 2,50,000 × 10% = ₹25,000
Year 1 closing value = 2,50,000 − 25,000 = ₹2,25,000
Year 2 closing value = 2,25,000 − 25,000 = ₹2,00,000
Year 3 closing value = 2,00,000 − 25,000 = ₹1,75,000

Example 9 — Depreciation with Partial Scrap Under Companies Act 2013

Under Companies Act 2013, the residual value should not exceed 5% of the original cost. A company purchases plant for ₹5,00,000. Useful life as per Schedule II: 15 years. What is the annual SLM depreciation?

Residual value = 5% of 5,00,000 = ₹25,000
Annual depreciation = (5,00,000 − 25,000) ÷ 15 = 4,75,000 ÷ 15 = ₹31,667 per year
SLM rate = 6.33% per annum (as per Schedule II)

Example 10 — Calculating Accumulated Depreciation at End of Year

A delivery vehicle purchased on 1 April 2020 cost ₹3,00,000. Salvage value: ₹30,000. Life: 6 years. What is the accumulated depreciation at the end of Year 4 (31 March 2024)?

Annual depreciation = (3,00,000 − 30,000) ÷ 6 = ₹45,000
Accumulated depreciation (4 years) = 45,000 × 4 = ₹1,80,000
Book value at end of Year 4 = 3,00,000 − 1,80,000 = ₹1,20,000

🔴 Nuanced Examples: Straight Line Method of Depreciation (Advanced Level)

These examples go beyond the formula. They involve asset disposal, change in estimate, comparison with WDV, and ACCA/CA Intermediate-level thinking.

Example 11 — Asset Sold Before End of Life

A company buys a machine on 1 April 2020 for ₹2,00,000. Salvage value: ₹20,000. Life: 5 years. On 31 March 2023 (after 3 years), the machine is sold for ₹1,00,000. What is the profit or loss on disposal?

Annual depreciation = (2,00,000 − 20,000) ÷ 5 = ₹36,000
Accumulated depreciation (3 years) = 36,000 × 3 = ₹1,08,000
Book value at disposal = 2,00,000 − 1,08,000 = ₹92,000
Sale proceeds = ₹1,00,000
Profit on disposal = 1,00,000 − 92,000 = ₹8,000

Example 12 — Change in Estimated Useful Life (Revision of Depreciation)

A company bought equipment on 1 April 2018 for ₹5,00,000. Residual value: ₹50,000. Original life: 10 years. After 3 years (as at 1 April 2021), management revises the remaining useful life to 4 more years. What is the revised annual depreciation?

Annual depreciation (original) = (5,00,000 − 50,000) ÷ 10 = ₹45,000
Accumulated depreciation (3 years) = 45,000 × 3 = ₹1,35,000
Book value on 1 April 2021 = 5,00,000 − 1,35,000 = ₹3,65,000
Revised depreciation = (3,65,000 − 50,000) ÷ 4 = 3,15,000 ÷ 4 = ₹78,750 per year

This is a prospective change under Ind AS 8. The change applies from the revision date, not retrospectively.

Example 13 — SLM with Revaluation (Building)

A building is purchased for ₹40,00,000. Life: 40 years. Residual value: ₹2,00,000. After 10 years the building is revalued to ₹42,00,000. Remaining life: still 30 years. What is the depreciation after revaluation?

Post-revaluation depreciation = (42,00,000 − 2,00,000) ÷ 30 = 40,00,000 ÷ 30 = ₹1,33,333 per year

Pre-revaluation annual depreciation was (40,00,000 − 2,00,000) ÷ 40 = ₹95,000. Revaluation increases the charge.

Example 14 — Partial Year Disposal (Pro-rata Depreciation)

A vehicle bought on 1 July 2021 for ₹4,50,000 (salvage ₹45,000, life 5 years) is sold on 30 September 2025. Accounting year ends 30 June. What depreciation is charged in the year of disposal?

Annual depreciation = (4,50,000 − 45,000) ÷ 5 = ₹81,000
Asset used in disposal year from 1 July 2025 to 30 September 2025 = 3 months
Depreciation in year of disposal = 81,000 × 3/12 = ₹20,250

Example 15 — SLM Under Companies Act 2013 (Plant & Machinery)

A manufacturing company buys general plant and machinery for ₹15,00,000 in April 2024. As per Schedule II of Companies Act 2013, useful life = 15 years. Residual value = 5% of cost.

Residual value = 5% of 15,00,000 = ₹75,000
Annual depreciation = (15,00,000 − 75,000) ÷ 15 = 14,25,000 ÷ 15 = ₹95,000 per year
SLM Rate = 6.33% per annum

Example 16 — Double Asset — Two Machines Combined

A company owns two machines:
Machine A: Cost ₹3,00,000, salvage ₹30,000, life 6 years
Machine B: Cost ₹2,40,000, salvage ₹24,000, life 6 years (purchased 6 months later)

Depreciation on A = (3,00,000 − 30,000) ÷ 6 = ₹45,000
Depreciation on B (half year first year) = (2,40,000 − 24,000) ÷ 6 × 6/12 = ₹18,000
Total depreciation in Year 1 = 45,000 + 18,000 = ₹63,000

Journal Entry for Straight Line Method of Depreciation

Every year, the depreciation charge under SLM is recorded with the same journal entry. There are two methods of recording:

Method 1: Charging to Asset Account

Method 2: Using Accumulated Depreciation Account (Preferred under Ind AS)

At year end, depreciation is transferred to the trial balance and ultimately hits the Profit and Loss statement as an operating expense. The ledger account for the asset shows the original cost; the accumulated depreciation account grows each year as a contra-asset.

SLM vs WDV Method: Key Differences

Students often ask: which is better — SLM or WDV? There is no universal answer. It depends on the nature of the asset and the business context. Here is a clean comparison:

Merits and Demerits of Straight Line Method of Depreciation

Merits (Advantages)

• Simple to calculate — the formula is straightforward; no recalculation needed each year
• Equal charge every year — makes financial planning and budgeting predictable
• Asset fully written off — at end of useful life, book value equals exactly the residual value
• Suitable for assets with uniform benefit — buildings, leasehold improvements, furniture
• Widely accepted — recognised under Companies Act 2013, IGAAP, and Ind AS 16 (IAS 16)
• Easy audit trail — constant annual charge is easy to verify and compare year on year

Demerits (Limitations)

• Ignores actual use — does not account for varying levels of asset utilisation across years
• Does not reflect market value — assets like vehicles depreciate faster early on; SLM understates this
• Repair cost mismatch — as assets age, repair costs rise but depreciation stays flat, creating an uneven total charge
• Not suitable for all assets — poor fit for assets with rapidly declining utility (computers, vehicles)
• Residual value estimation risk — salvage value is an estimate; errors affect depreciation for the entire life

Straight Line Method Under Companies Act 2013

The Companies Act 2013, through Schedule II, mandates that depreciation be charged based on the useful life of an asset. Companies can use either SLM or WDV. However, the residual value must ordinarily not exceed 5% of the original cost.

Common SLM rates as per Schedule II:

The rate of depreciation under the straight line method = 100% ÷ Useful Life (years), net of residual value adjustment. For example, for plant with a 15-year life and 5% residual: Rate = (95% of cost ÷ 15 years) = approximately 6.33% p.a.

Related Accounting Guides on Eduyush

• Journal Entry Examples — how to record depreciation and 100+ other accounting transactions
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• Trial Balance — where your depreciation figures land after posting
• Bank Reconciliation Statement — another key period-end accounting task
• Types of Errors in Accounting — errors that affect your depreciation figures
• Financial Ratios — how depreciation impacts return on assets and asset turnover ratios

Frequently Asked Questions: Straight Line Method of Depreciation

What is the straight line method of depreciation?

The straight line method of depreciation (SLM) allocates the depreciable cost of a fixed asset equally across its useful life. It is also called the fixed instalment method or original cost method. The formula is: Depreciation = (Cost − Salvage Value) ÷ Useful Life.

What is excluded in the straight line method of depreciation?

Land is excluded from depreciation under SLM. Land is not a depreciable asset because it does not wear out or have a finite useful life. Depreciation applies only to fixed assets that are consumed over time: buildings, machinery, vehicles, furniture, and computers.

According to the straight line method of providing depreciation, the depreciation is —

According to the straight line method, the depreciation charge is constant and equal every year. It does not change regardless of the asset's actual usage or remaining book value. This is the core feature that distinguishes SLM from the WDV (diminishing balance) method.

What is the rate of depreciation under the straight line method?

The rate = (Annual Depreciation ÷ Original Cost) × 100. Under Companies Act 2013, the SLM rate for general plant and machinery is 6.33% p.a. (15-year life), motor vehicles 11.88% p.a. (8-year life), computers 31.67% p.a. (3-year life).

When is the straight line method of depreciation most commonly adopted?

SLM is most commonly adopted when: (1) the asset provides uniform benefit each year, (2) repair costs remain relatively stable, (3) the business wants simple, predictable depreciation charges for budgeting, or (4) the asset is a building or leasehold improvement with a long, stable life.

Is land depreciated under the straight line method?

No. Land is never depreciated under SLM or any other depreciation method. It has an indefinite useful life and is not consumed. Only the building on land is depreciated.

What is straight line value method (SLV) of depreciation?

Straight line value method is another name for the straight line method (SLM) of depreciation. The term emphasises that the asset's value reduces in a straight line over time — by equal amounts each year until it reaches the residual (salvage) value.