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The Straight-Line Method of Calculating Depreciation

This allows an equal amount to be charged as depreciation for each year of the expected use of the asset.

The basic formula is:

ORIGINAL COST - ESTIMATED COST WHEN SOLD / NO. OF YRS OF EXPECTED USE PROVISION PER YR. = DEPRECIATION

In Pepe's case, he paid £ 20,000 for a motor vehicle. He expects to use it for four years before he replaces it. He estimates that when he sells it in four years time he will get £ 8,000 for it. So, for Pepe, the calculation for the provision for depreciation would be:

The figures from which to calculate the depreciation are normally given as a note at the end of the Trial Balance. This means that within the accounts there must be both a credit and debit entry.

So the Provision for depreciation FOR THAT YEAR is added as an expense on the Trading & Profit & Loss Account.

Click here to see the revised Trading & Profit & Loss Account

On the Balance Sheet, the total amount of depreciation, (the provision for depreciation for this year plus any other provision from previous years) is deducted from the original value of the motor vehicle and so reduces the value of the fixed assets.

Click here to see the revised Balance Sheet

Or click here to move on to the Reducing balance method

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