The term depreciation refers to a reduction in the value of an asset over the period of time.
Either it is machinery, equipment, tool, building, power plant or any other property, there is always reduction in its value every year due to depreciation. Once the lifespan of plant is over, it needs to be replaced. It is therefore vital to implement a depreciation charge system, so that, once lifespan of power plant is over, the collected depreciation charges should cover the replacement charges.
Single line depreciation formula is a method used to find the annual depreciation charge.
In straight line method, a constant depreciation charge is made on per year basis. This charge is based on total depreciation and useful life of power plant. The straight-line depreciation method is most popular method. It is simple and is widely employed to find the depreciation of an asset over time without particular pattern.
The annual depreciation charge equals to total depreciation divided by useful life of the property.
Single Line method Annual Depreciation Charge Formula
Annual Depreciation Charge = (P – S)/n
- P = Initial cost of plant/equipment/machinery
- S = Scrap value after useful life
- n = Useful life of equipment (in years)
Straight Line Depreciation Curve
As its name implies, the depreciation curve (PQ) follows a straight-line path that indicates constant annual depreciation charge. The figure below shows the graphical representation of this. It is evident that initial value P of the equipment reduces uniformly through depreciation to the scrap value S in the useful life of the equipment.
Example 1: If initial cost of a machinery having 20 years useful life is $5,00,000 and the scrap value of machinery is $20,000. Find annual depreciation charge for the machinery.
P = Initial cost of plant = $5,00,000
S = Scrap value after useful life = $20,000
n = Useful life of equipment (in years) = 20
Annual depreciation charge = (P – S)/n = (500000 – 20000) / 20 = 24000