Under this method, the amount of depreciation is uniform from year to year. For example, if an asset costs INR 1,00,000 and depreciation is fixed at 10%, then INR 10,000 would be written off every year. This method is also called ‘Fixed Installment Method’ or ‘Original Cost Method’.
Out of the cost of the asset, its scrap value is deducted and it is divided by the number of years of its estimated life.
Merits of Straight Line Method
Calculation of depreciation under this method is very simple and therefore the method is widely popular. Once the amount of depreciation is calculated, the same amount is written off as depreciation each year. Hence, this method is simple and calculations are easier to understand.
2. Asset is completely Written Off
Under this method, the book value of an asset is reduced to net scrap value or zero value. In the books of accounts, the value of the asset at the end of its useful life is equal to zero or its residual value.
Limitations of Straight Line Method
1. Difficulty in Computation
When there are various machines having different life-spans, the computation of depreciation becomes complicated because the depreciation on each machine will have to be calculated separately for each asset.
The expense on repairs and maintenance increases as the asset becomes older. Thus, the total burden on Profit and Loss Account, depreciation plus repair expenses, is more in later years in comparison to earlier years. This is illogical because the efficiency and productivity of the asset is more in earlier years and less in later years.