The straight line depreciation is the most common method used to depreciate assets over
their lifespan.
I’m Adam Selby and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at what is the Straight Line method of Depreciation.
If you do not know what depreciation is. Depreciation is the reduction of value to an asset. Additionally
you can find out more about this in the previous video on “What is Depreciation”.
The straight line method of depreciation is a technique used when an asset's worth will
decrease in value by the same fixed rate or amount each year.
In order to find out how much the asset is going to be depreciated by each year, the
following factors need to be identified...
The first factor is the cost - this is how much the asset cost when initially acquired
by the business.
The next factor is the residual value - you need to know if the asset will be worth any
value at the time when the asset is disposed of.
The final factor is the useful life - this is the estimated time period from acquisition
of the asset to the disposal of the asset.
These three factors are used to work out the rate of depreciation for an asset in terms
of a percentage.
The equation for the rate of depreciation can be shown as...
Rate of deprecation = (1/useful life) x 100
Lets have a look at an example.
Bernie, a self employed accountant, bought a new computer for £25,000.
She expects the computer to have a useful life of 4 years. And she assumes that after
the 4 year period she will be able to sell her computer for £5,000.
What will Bernie's charged per year for deprecation to the new computer be if she uses the straight
line method?
To work out the annual depreciation on the computer you take the cost which is £25,000
and then you minus the residual value , i.e. the amount Bernie will sell the computer for
after the 4 year period which is £5,000.
You take the net of £25,000 - £5,000 which equals to £20,000. You take this amount and
divide it by the useful life which is 4 years and this results to a depreciation charge
of £5,000 per annum.
To work the rate of depreciation as a percentage you would do 1/4 x 100 = 25% and this is the
amount the computer would depreciate by each year.
You then take the percentage or depreciation rate away from the net of cost after residual
value.
In this example it would be £25,000 - £5,000 x 25% = £5,000
Additionally, if you want to know how much the computer is worth
after 2 years you would take the cost minus residual value and times by the depreciation
rate and by the years which will be...
£25,000 - £5,000 = £20,000
£20,000 x 25% x 2 = £10,000
So that was the explanation of Straight Line method of Depreciation. If you enjoyed it,
press the like button.
If you have a question you want answered leave it in the comments below and we’ll try to
answer it.
And if you’re not already subscribed make sure you click on the big red subscribe button
above to keep you updated with The Accounting Student.
Thanks for watching and we will see you next time.