Straight Line/Fixed Installment Method - SS1 Accounting Lesson Note

The straight-line or fixed instalment method of depreciation is a simple way of spreading out the cost of a tangible asset over its useful life. The method assumes that the asset depreciates at an equal rate over its useful life, and therefore allocates the same amount of depreciation expense each year.

Example 1:

If a company purchases a car for ₦1,000,000 and expects it to last for 5 years, it would use the straight-line method to calculate the depreciation expense as follows:

Depreciation expense = (Cost of asset - Salvage value) / Useful life

Depreciation expense = (₦1,000,000 - 0) / 5 years

Depreciation expense = ₦200,000 per year

So, the company would record ₦200,000 in depreciation expense for each of the 5 years, until the car has been fully depreciated.

 

Example 2:

A factory building that cost ₦10,000,000 to construct, with a useful life of 20 years and a salvage value of ₦2,000,000. The annual depreciation expense using the straight-line method would be calculated as follows:

Depreciation expense = (Cost of asset - Salvage value) / Useful life

Depreciation expense = (₦10,000,000 - ₦2,000,000) / 20 years

Depreciation expense = ₦400,000 per year

So, the company would record ₦400,000 in depreciation expense for each of the 20 years, until the factory building has been fully depreciated.