Straight-Line Method of Depreciation (Cambridge International A-Level Accounting)

Straight-line depreciation

Spec point — how to calculate depreciation using the reducing balance and straight-line methods

What is the straight-line method of depreciation?

• The straight-line method of depreciation assumes that a non-current asset loses value at a constant rate over its useful life

  • This means that the expense for its depreciation is the same each year

  • The net book value can reach $0

    • This is when the asset is fully depreciated

• You could be given the depreciation rate as a percentage of its original value

  • E.g. depreciation could be charged at 20% of its original cost

• Or you could be expected to calculate the depreciation using:

  • The number of years that the non-current asset will be used

  • The expected value of the non-current asset at the end of its working life

    • This value could be $0
    • The expected value is also called the residual value

• This method is usually used when the asset will be equally valuable for each year of its use

  • For example, fixtures and fittings, equipment, etc

Example of an asset which cost $20 000, being charged depreciation at 15% per annum using the straight-line method

How do I calculate depreciation using the straight-line method?

• If you are given the percentage for the depreciation

  • Find the percentage of the original amount
  • This will be the yearly depreciation charge

• If you are not given the percentage

  • Calculate the expected loss in value during the expected life of the non-current asset

    • The original value minus the expected value at the end of its life

  • Divide the loss by the number of years it will be used

  • This will be the yearly depreciation charge

$\mathrm{Depreciation}=\frac{\mathrm{original} \mathrm{value}-\mathrm{expected} \mathrm{value}}{\mathrm{number} \mathrm{of} \mathrm{years}}$

Exam Hint The straight-line method is similar to simple interest calculations used in maths.

Worked Example Abi purchases machinery for $18 000. Machinery is depreciated at 15% per annum using the straight-line method.

Calculate the net book value of the machinery after 3 years.

Answer:

• Calculate the yearly expense due to depreciation

15% × $18 000 = $2 700

• Calculate the total depreciation after 3 years

3 × $2 700 = $8 100

• Subtract the depreciation from the original value

$18 000 - $8 100 = $9 900

Worked Example Taiki purchases a vehicle for $30 000. He expects to use the vehicle for 3 years, after which he estimates that it will have a value of $12 000.

Calculate the yearly expense due to the depreciation of the vehicle.

Answer:

• Calculate the loss in value over the 3 years

$30 000 - $12 000 = $18 000

• Divide this by the number of years

$18 000 ÷ 3 =** $6 000**