straight-line depreciation The straight line method is the simplest method of depreciation in which every year a fixed amount is written off as depreciation from the value of the Asset.  There are some common factors on which their calculation depends. These factors are listed below. According to the Diminishing Balance Method, depreciation is charged at a fixed percentage on the book value of the asset. As the book value reduces every year, it is also known as the Reducing Balance Method or Written-down Value Method. if you have any issue contact with me My mail address baqiralisiddique@gmail.com

1. Financial statement
Analysis
By: Baqir siddique

2. “Reduced the value of asset
during the particular period of
time
2
Depreciation

3. Depreciation Methods
1.Straight line method
 The straight line method is the
simplest method of depreciation in
which every year a fixed amount is
written off as depreciation from the
value of the Asset.
 There are some common factors on
which their calculation depends.
These factors are listed below:

4. 1. Original Cost (or Historical Cost) of the
Asset to be depreciated:
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2. Useful life of the Asset:
such as legal or contractual provisions, level
of use of the asset, degree of maintenance
and technological developments.
3. Estimated residual value or scrap value:
It is the value estimated to be realised after
complete commercial utilisation of a fixed
asset.

5. 5
Formula:
Depreciation = (Cost – Estimated Salvage value)
Estimated useful life
Example:
Suppose that a Machine costs Rupees 100000 and has an estimated useful life of 8 years and a Salvage
value of Rupees 20000. If we follow the straight line method or fixed installment method of depreciation
for the machine then the amount to be depreciated every year would be as follows:
= (100000 – 20000)/ 8
= Rs. 10000.
Year Cost Depreciation
Net Book Value
(at the end of the
year)
1 1,00,000 10,000 90,000
2 90,000 10,000 80,000
3 80,000 10,000 70,000
4 70,000 10,000 60,000
5 60,000 10,000 50,000
6 50,000 10,000 40,000
7 40,000 10,000 30,000
8 30,000 10,000 20,000

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Advantage :
1. Simplest method of deprecation and the calculation is easiest
of all other.
2. This method provides for improved comparability since there
are no change in rate.
3. Its calculated original cost over the life time.
Disadvantage :
1. Its ignore the efficiency of asset which are decrease with the time
2. The amount of depreciation in a function time only
3. Not suitable for machinery items

7. According to the Diminishing Balance Method,
depreciation is charged at a fixed percentage on
the book value of the asset. As the book value
reduces every year, it is also known as the
Reducing Balance Method or Written-down
Value Method.
2. Written down value 0r Diminishing Method
Formula :

8. 8
Example:
year Cost/WDV
Depreciation @ 10% on
WDV
Net Book Value (at the
end of the year)
1 1,00,000 10,000 90,000
2 90,000 9,000 81,000
3 81,000 8,100 72,900
4 72,900 7,290 65,610
5 65,610 6,561 59,049
6 59,049 5,905 53,144
7 53,144 5,314 47,830
8 47,830 4,783 43,047
Cost = 100,000
Salvage value = 43,047
Year = 8
Depreciation = 10%

9. 9
Advantage :
1. Under this method, depreciation is calculated according to
the net book value of the asset .
2. This method can be proved very helpful in adopting the better
matching of revenue and expenses .
3. Amount of depression reduced with the reducing the balance of asset .
Disadvantage :
1. Under this method boo value cannot be zero
2. Not suitable for an asset having a short life .
3. Only suitable for motor vehicles, machines and plant etc

10. 10
3. Double Declining balance Method
This method is a mix of straight line and
diminishing balance method. This method
applied three steps :
Step 1:
Straight line rate= 100% / useful life
Step 2:
Double declining balance rate= 2*straight line rate
Step 3:
Deprecation expenses= double decline balance rate* beginning period book value
Siddique textiles purchased machinery for RS 10,000 on 1st January. It has an estimated
useful life of 5 years and an estimated residual value of RS 1,000. The firm sells the asset
at the residual value at the end of the 10th year. The shoes machine has an expected
production of 36,000 units during its useful life. Now the production pattern is as follows:
Example:

11. 11
Formula:
Straight line rate= 100% / 5= 20%
Deprecation expenses= double decline balance rate* beginning period book
value
Step 1:
Step 3:
year Beginning of
period book value
Deprecation
rate
Deprecation
Expenses
Accumulated
depreciation
Book value
1 10,000 40% 4,000 4000 6000
2 6,000 40 2,400 6400 3600
3 9,600 40 1,440 7840 3160
4 2,160 40 846 8704 1296
5 1,296 40 296* 9,000 1000
Step 2: Double declining balance rate= 2*20%= 40%
Note : 11296-1000= 296 never depreciate book value below salvage value

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Advantage :
1. A firm will generate more interest if it invest the depreciation
outside the firm. It helps to create more fund at the time of
replacement of asset..
2. The firm will face minimum loss at the time of disposal of asset due to
innovation as a large part has already changed to profit and loss account
by way of depreciation.
Disadvantage :
1. This method shows lower profit in the earlier year as high
depreciation is charged. It will show poor performance in the initial
year.
2. The investors are unhappy as they get low dividend in the earlier
year for generating lower profit by the firm.
3. they face high cost of production due to higher depreciation.

13. 13
 This method of charging depreciation on
the asset is based on the units produced
during the year. The estimated total
production of the asset is the criteria for
providing depreciation.
 Assets on which this method can be
applied are Plant and Machinery. As their
wear and tear will depend on how much
we use them.
4. Units of Production Method

14. 14
Formula:
Depreciation per unit = Cost- Salvage value
Total units of production
Step 1:
Step 2: Deprecation Expense = Depreciation per unit * units of produced in period
Example:
Siddique textiles purchased machinery for RS 10,000 on 1st January. It has an estimated useful life of
5 years and an estimated residual value of RS 1,000. The firm sells the asset at the residual value at
the end of the 10th year. The shoes machine has an expected production of 36,000 units during its
useful life. Now the production pattern is as follows:
Year
Production Year
production
1 7000 units per year 4 7000 units
2 8000 units per year 5 5000units
3 9000 units per year

15. 15
Depreciation per unit = 10,000-1,000
36,000 units
=0.25 per unit
Deprecation Expense= 0.25 per unit * 7,000 units in first year = 1750
Year No of Units Depreciation
per unit
Depreciation
Expense
Accumulated
depreciation
Book
value
1 7,000 0.25 per unit 1750 1750 8250
2 8,000 0.25 2,000 3750 6250
3 9,000 0.25 2,250 6,000 4000
4 7,000 0.25 1,750 7,750 2250
5 5,000 0.25 12,50 9,000 1000

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Advantage :
 This method is based on no of units of production .
 When the productivity of low and deprecation is also low.
Disadvantage :
 Only suitable for production items machines.

17. Thanks!
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