Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Straight Line Method of Depreciation: Formula and Examples

Updated 10 October 2026 · Fact-checked

The straight line method charges the same depreciation every full year. Annual depreciation = (Cost of asset − Scrap value) ÷ Useful life in years. Cost includes purchase price plus installation and other costs to make the asset ready for use. For part-year purchases, multiply the annual amount by months used ÷ 12.

Understand Straight Line Method of Depreciation

Depreciation is the fall in the value of a fixed asset because of use, passage of time or obsolescence. Accounting spreads the cost of the asset over the years it is expected to serve the business. This matches the cost with the revenue the asset helps earn.

The straight line method (also called fixed instalment method) is the simplest way to do this. You take the amount that will be written off over the asset's life and divide it equally across the years. The charge is the same every year, so a graph of depreciation against time is a flat line. That is where the name comes from.

The amount to be written off is the depreciable amount: original cost less estimated scrap value (residual value) at the end of life. Original cost includes the purchase price, freight, installation and any other cost needed to bring the asset to working condition. Scrap value is what you expect to get when you sell the asset at the end of its life.

If an asset is bought during the year, depreciation is usually charged only for the period of use, normally calculated month by month. If the question says depreciation is charged for the full year on any purchase, follow the question. Read the wording on the date of purchase and the date of the books closing.

Key formulas to remember

Annual depreciation (straight line): Annual depreciation = (Cost − Scrap value) ÷ Estimated useful life (years); Cost includes freight, installation and other costs to make the asset ready for use.
Rate of depreciation: Rate % = (Annual depreciation ÷ Cost) × 100; The rate is applied on original cost every year, not on the reducing book value.
Depreciation as a percentage of cost: Annual depreciation = Cost × Rate % (when scrap value is ignored or the rate is given); If a rate is given on cost, use it directly. Do not deduct scrap value again unless the question says so.
Part-year depreciation: Depreciation for the period = Annual depreciation × Months used ÷ 12; Count the months from the date of purchase to the date of closing the books.
Book value: Book value = Cost − Accumulated depreciation; Book value falls by an equal amount each full year.

How to solve Straight Line Method of Depreciation questions

Use this order for any straight line question, whether it asks for depreciation, rate, book value or the cost.

1Find the original cost: purchase price plus freight, installation and other costs to make the asset ready for use. Do not add later repairs.
2Note the scrap value. If none is stated, take it as nil.
3Note the useful life in years, or the rate of depreciation if it is given.
4Compute annual depreciation = (Cost − Scrap) ÷ Life, or Cost × Rate.
5Check the date of purchase and the date of closing the books. If the asset was used for part of the year, multiply by months ÷ 12.
6Add up depreciation charged in earlier years to get accumulated depreciation.
7Find book value = Cost − Accumulated depreciation, and match the answer to one of the four options.

Quickest way: Annual amount first, then count the months

When to use it: Use this for most MCQs, especially when the asset is bought mid-year or the question asks for book value after a few years.

Work out the annual depreciation in one line using simple numbers.
Convert the period to months and take months ÷ 12 of the annual amount for the first year.
For book value, total depreciation = first-year part + full years after that. Subtract it from cost.
If scrap value is given as a rate or amount, subtract it before dividing. If not, ignore it.
Eliminate options that show reducing-balance style answers, where depreciation falls each year.

Common mistakes in Straight Line Method of Depreciation

Forgetting to deduct scrap value before dividing by life.
Students remember 'cost ÷ life' and skip the scrap value that the question gives.
Fix: Always write (Cost − Scrap) first. Scrap is nil only if the question says so or is silent.
Leaving out installation or freight from the cost.
Students take only the invoice price as cost.
Fix: Add all costs that are needed to bring the asset to working condition. Exclude later repairs and running costs.
Charging a full year's depreciation on a mid-year purchase.
Students ignore the purchase date.
Fix: Multiply by months used ÷ 12 unless the question says to charge for the full year.
Applying the rate on book value instead of original cost.
Students mix up straight line with diminishing balance.
Fix: In straight line the base is always the original cost. The charge stays equal each full year.
Deducting scrap value when a rate on cost is already given.
Students apply the formula mechanically.
Fix: If the question says 'depreciation at 10% on cost', compute Cost × 10% directly.
Stating book value as cost minus one year's depreciation after several years.
Students forget that depreciation accumulates.
Fix: Multiply annual depreciation by the number of years used, then subtract from cost.

Worked examples

Example 1

A machine was bought for ₹4,00,000 and installation cost ₹20,000 was paid. Its estimated life is 10 years and the scrap value is ₹20,000. Find the annual depreciation and the book value at the end of year 3.

Show the solution

Cost = ₹4,00,000 + ₹20,000 = ₹4,20,000.
Depreciable amount = ₹4,20,000 − ₹20,000 = ₹4,00,000.
Annual depreciation = ₹4,00,000 ÷ 10 = ₹40,000.
Depreciation for 3 years = ₹40,000 × 3 = ₹1,20,000.
Book value at end of year 3 = ₹4,20,000 − ₹1,20,000 = ₹3,00,000.

Answer: Annual depreciation is ₹40,000 and the book value at the end of year 3 is ₹3,00,000.

Example 2

Sharma Traders buys furniture on 1 July 2026 for ₹1,20,000 and spends ₹12,000 on fitting. It estimates a life of 8 years with scrap value of ₹12,000. Books are closed on 31 March every year. Find the depreciation for the year ending 31 March 2027 and the book value on that date.

Show the solution

Cost = ₹1,20,000 + ₹12,000 = ₹1,32,000.
Depreciable amount = ₹1,32,000 − ₹12,000 = ₹1,20,000.
Annual depreciation = ₹1,20,000 ÷ 8 = ₹15,000.
Months of use from 1 July 2026 to 31 March 2027 = 9.
Depreciation for the year = ₹15,000 × 9 ÷ 12 = ₹11,250.
Book value on 31 March 2027 = ₹1,32,000 − ₹11,250 = ₹1,20,750.

Answer: Depreciation for the year is ₹11,250 and the book value on 31 March 2027 is ₹1,20,750.

Exam tips

Read the cost carefully. Installation, freight and erection charges are added; repairs after use are not.
Check for the words 'on cost' or 'on original cost'. Then use Cost × Rate and ignore scrap value.
For mid-year purchases, count months from the purchase date to the closing date. Use the question's rule if it says to charge for full year.
Quickly test each option: the straight line answer must be the same amount every full year.
Recall the merits and demerits in one line each. Merit: simple and the book value can reach scrap value. Demerit: it ignores the rising repair cost in later years and the interest on money locked in the asset.

Practice questions from Depreciation (Straight Line and Diminishing Balance Methods)

Straight Line Method of Depreciation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Straight Line Method of Depreciation: frequently asked questions

What is the formula for the straight line method of depreciation?

Annual depreciation = (Cost of asset − Scrap value) ÷ Estimated useful life in years. Cost includes the purchase price and the cost of installing the asset. The same amount is charged each full year.

How do I calculate depreciation when an asset is bought during the year?

Find the annual depreciation first. Then multiply it by the number of months the asset was used in that year and divide by 12. Follow the question if it gives a different rule, such as a full year's charge.

What are the merits and demerits of the straight line method?

Merits: it is simple, easy to apply, and the asset can be written down exactly to its scrap value. Demerits: the charge is equal each year although the asset's usefulness and repair costs change, and it does not consider interest on the capital invested. Total cost of use, including repairs, becomes higher in later years.

Is scrap value always deducted in the straight line method?

No. Deduct it when it is given and the question asks for depreciation based on life. If depreciation is given as a rate on cost, apply the rate to the cost directly. If scrap value is not mentioned, take it as nil.