6.2. Calculation Using Straight Line Method

So, first is your straight line method as the name indicates the depreciation is going to be uniform. So, if you look into the trend, we drawn this diagram earlier age of the equipment and the value of the asset. So, in this straight line method, we assume that the depreciation rate is uniform over its useful life so the rate is uniform over the useful life you have every year the machine is going to lose the same value that is what is the assumption for the accounting purpose.

The Straight Line Method of depreciation is a straightforward approach to estimating the loss in value of an asset over its useful life. It assumes that the asset loses the same amount of value every year. This can be visually represented on a graph, where the X-axis shows the age of the equipment and the Y-axis shows the value. In a straight line, the depreciation amount decreases steadily over the years until it reaches zero at the end of its useful life.

Think of a new car bought for $20,000. If the car has a useful life of 10 years and is expected to have a salvage value of$2,000 at the end, the straight-line depreciation would mean that the car loses $1,800 in value each year ($20,000 initial value - $2,000 salvage value =$18,000 depreciation over 10 years; $18,000 ÷ 10 years =$1,800 per year). This makes it easy to budget for the car's depreciation.

Now, how to calculate the depreciation so, depreciation is nothing but your initial cost? Whatever your purchase initial cost and at the end of the useful life at what price you are going to sell salvage value is whatever they indicate S your salvage value is S. And one more important thing you have to note is you are going to deduct the tire cost. So, because your tire depreciates at a different rate from the rest of the equipment particularly rubber tires, you can say that the life of the tire rubber tire will be different from the life of the remaining part of the equipment. So, the tire will depreciate faster.

To calculate depreciation using the Straight Line Method, you need to determine the initial cost of the asset, the salvage value, and any other costs that should be deducted, such as the cost of tires that may have a different depreciation rate. The formula for annual depreciation is:

$D = \frac{IC - S - TC}{n}$
where:

• D is the annual depreciation,
• IC is the initial cost,
• S is the salvage value,
• TC is the tire cost,
• n is the useful life in years.
  This formula provides the annual depreciation figure, giving a consistent value each year.

Imagine you buy a laptop for $1,000, and you expect to sell it for$100 after 5 years. You might also consider the additional 50 you spent on an extended warranty that won't depreciate the same way. So in this case, your formula looks like this: $$ D = \frac{1000 - 100 - 50}{5} = \frac{850}{5} = 170 $$ So you would record 170 as the depreciation expense for each year for 5 years.

This is the easiest method and most convenient method to calculate the depreciation but it is not commonly adopted because this gives lesser amount of depreciation in the early age of the machine. So, lesser amount of depreciation is experienced when you use this method. So, that is why they say it is not giving a realistic value people always prefer to have accelerated depreciation.

The Straight Line Method is simple and convenient, making it easy for accountants and financial managers to apply. However, because it provides a constant depreciation value, it does not reflect the actual wear and tear of the equipment accurately, particularly in the early years of its use when depreciation may be more severe. Consequently, many businesses opt for accelerated depreciation methods that offer larger deductions in the early years to better match the asset’s usage and economic reality.

Consider a new smartphone that quickly becomes outdated as new models are released. With straight-line depreciation, you might record a uniform decrease in value yearly, but the phone loses much of its worth right after purchase. In contrast, accelerated depreciation would capture this rapid decline, taking into account that the phone is less marketable after the first year.

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