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Straight Line Method (SLM) of Depreciation

"Equal depreciation charge every year - simple, consistent, and fair."

The Straight Line Method (SLM), also called the Fixed Installment Method, is the simplest way to calculate depreciation.

Concept

Under SLM, equal amount of depreciation is charged every year throughout the asset's useful life.

Result: The asset's value decreases by the same amount annually, forming a straight line when graphed (hence the name).

Formula

Annual Depreciation = (Cost - Scrap Value) / Useful Life in Years

OR

Rate of Depreciation = (Annual Depreciation / Original Cost) × 100

Example 1: Basic Calculation

Data:

  • Machine purchased on 1st April 2020: ₹1,00,000
  • Estimated life: 10 years
  • Scrap value: ₹10,000

Calculation:

Depreciable Amount = ₹1,00,000 - ₹10,000 = ₹90,000
Annual Depreciation = ₹90,000 ÷ 10 years = ₹9,000/year

Depreciation Schedule:

YearOpening ValueDepreciationAccumulated Dep.Closing Value
2020-211,00,0009,0009,00091,000
2021-2291,0009,00018,00082,000
2022-2382,0009,00027,00073,000
......9,000......
2029-3019,0009,00090,00010,000 (Scrap)

Journal Entries

Annual Entry (every year):

Depreciation A/c             Dr.    ₹9,000
    To Machinery A/c                    ₹9,000
(Being depreciation charged on machinery @ SLM)

At year-end, transfer to P&L:

Profit & Loss A/c            Dr.    ₹9,000
    To Depreciation A/c                 ₹9,000
(Being depreciation transferred to P&L)

Characteristics of SLM

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Advantages of SLM

  1. Simplicity: Easy to understand and calculate.
  2. Predictability: Fixed annual expense - helps in budgeting.
  3. Fair Allocation: Asset cost spread equally over its life.
  4. Suitable for: Assets with consistent usage (buildings, furniture, patents).

Disadvantages of SLM

  1. Ignores Usage Pattern: Machine used 24/7 gets same depreciation as one used 2 hours/day.
  2. Higher Early Repairs Ignored: Old assets need more repairs, but depreciation remains same.
  3. Not Tax-Friendly: Income Tax Act prefers WDV method (higher early deductions).
  4. Doesn't Reflect Reality: Most assets lose more value in early years.

Example 2: Calculating Rate

Find the rate of depreciation:

  • Original Cost: ₹50,000
  • Scrap Value: ₹5,000
  • Useful Life: 5 years

Step 1: Annual Depreciation = (₹50,000 - ₹5,000) ÷ 5 = ₹9,000

Step 2: Rate = (₹9,000 ÷ ₹50,000) × 100 = 18% p.a.

SLM with Part-Year Purchase

Question: If asset is purchased mid-year, how to calculate depreciation?

Rule: Charge depreciation proportionately for the period of use.

Example 3: Mid-Year Purchase

Data:

  • Furniture purchased on 1st October 2023: ₹60,000
  • Life: 10 years, Scrap: ₹Nil
  • Financial year: April-March

Calculation:

Annual Full Depreciation = ₹60,000 ÷ 10 = ₹6,000

For Year 2023-24 (Oct to March = 6 months):
Depreciation = ₹6,000 × 6/12 = ₹3,000

Real-World Application

Infosys - Office Buildings

Infosys owns multiple office campuses worth thousands of crores.

  • Cost of Building: ₹500 Crores
  • Useful Life: 60 years
  • Scrap Value: ₹50 Crores
  • Annual Depreciation (SLM): (₹500 Cr - ₹50 Cr) ÷ 60 = ₹7.5 Crores/year

This ₹7.5 Crores is charged as an expense every year, ensuring the building's cost is gradually written off over its useful life.

Comparison: Original Cost vs Written Down Value

(We'll learn WDV method in the next lesson, but here's a preview)

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Quiz: Straight Line Method

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