Explain Straight Line Methods and its Advantages.

This method is based on the assumption of equal usage of the assets over its entire useful life. It is called straight line for a reason that if the amount of depreciation and corresponding time period is plotted on a graph it will result in a straight line.

It is also called fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the asset. According to this method, a fixed and an equal amount is charged as depreciation in every accounting period during the lifetime of an assets, and this amount reduces the original cost of the asset to its scrap value.

The formula to compute the depreciation amount

Cost of assets – Estimated net residential value

Depreciation Amount = ------------------------------------------------------

Estimated useful life of the asset

The formula to compute the rate of depreciation

Annual depreciation amount

Rate of Depreciation= ------------------------------- x 100

Acquisition cost

Advantages of Straight Line Method

• It is very simple, easy to understand and apply.
• Assets can be depreciated upto the net scrap value or zero value.
• Every year, same amount is charged as depreciation in profit and loss account. This makes comparison of profit for different years easy.
• This method is suitable for those assets whose useful life can be estimated accurately and where the use of the assets is consistent from year to year.