How to calculate depreciation (straight-line method)

Step by step

1. Find the depreciable amount. Take the asset's cost and subtract its estimated residual (scrap) value.
2. Divide by useful life. Divide the depreciable amount by the number of years of useful life. This is the annual charge.
3. Charge the same amount each year. Record the same depreciation charge every year of the asset's life.
4. Update accumulated depreciation. Add each year's charge to the running total of accumulated depreciation.
5. Find the carrying amount. Cost less accumulated depreciation gives the carrying amount at any point.

Worked example

A machine costs RM10,000 with a residual value of RM1,000 and a 5-year life: (10,000 − 1,000) ÷ 5 = RM1,800 per year.

Understanding the method

A non-current asset is bought once but helps earn revenue for many years. The accruals concept says its cost should be spread over those years. Straight-line is the simplest way: an equal slice of cost is charged as an expense each year.

This is a spread of cost, not a record of what the asset would sell for. So the carrying amount (cost less accumulated depreciation) will not match the second-hand price, and it should not.

The depreciable amount is cost minus residual value. Residual value is what the business expects to recover at the end, often by selling the old asset. Dividing the depreciable amount by the years of life gives the annual charge.

If a question gives a percentage, apply it to cost every year. That is why the charge stays constant. A charge that falls each year means you have slipped into reducing balance.

The same three inputs can be worded differently. Residual value may be called scrap value, disposal value or trade-in value. A rate of 20% a year implies a five-year life.

If no residual value is mentioned, treat it as nil. If the asset was bought part-way through the year, check whether the question wants the charge for the months owned.

Here is an example. A delivery van costs RM48,000, with a residual value of RM6,000 and a life of six years.

The depreciable amount is 48,000 − 6,000 = RM42,000. The annual charge is 42,000 ÷ 6 = RM7,000.

After year 1, accumulated depreciation is RM7,000 and the carrying amount is RM41,000. After year 2, they are RM14,000 and RM34,000. After year 6, accumulated depreciation is RM42,000 and the carrying amount is RM6,000, exactly the residual value.

This gives a check. Annual charge × years elapsed must equal accumulated depreciation, and cost less that must equal the carrying amount. The carrying amount should never fall below residual value.

Common mistakes: dividing cost by life without deducting residual value, which overstates the charge. Another is mixing up the year's charge (one figure in the income statement) with accumulated depreciation (a running total in the statement of financial position).

Remember depreciation is a non-cash expense. It reduces profit and the asset's value, but no money leaves the business when it is recorded.

If depreciation questions lose you marks on residual value or part-year charges, one of our teachers can go through them with you one-to-one. Book a trial class

Related skills

• How to calculate depreciation (reducing balance method)
• How to prepare a statement of financial position

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.