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Straight Line Method Depreciation

07 March 2020

Dear Friends
How do we calculate SLM?
Asset Value 10000, Salvage 500, Net 9500, Life 3 years.
9500/3 : 3167 Depn cost per year
3167/12 : 264 Depn cost per month

This montly depn cost is same for all 12 months? Bcoz, Jan month is 30Days, 28 and 31 days for Feb & March month respectively. In this cases how do we account same depn cost for all 12 months?

Definitely it will be inaccurate for costing in Manufacturing Industry.

mohanraj_vkj @ yahoo.co.in

mohanraj_vkj @ yahoo.co.in

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3 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 20 April 2020

Depreciation policy is to charge it annually. If you need it monthly, dividing by 12 give the accurate measurement because systematic reduction of the asset is evenly spread. This is the meaning of SLM.

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Mohanraj J (1162 Points)
Replied 27 April 2020

But, how equal depreciation cost for all months? Working days are vary from month to month. Jan 31 Days, Feb 28/29 Days, Apr 30 Day.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 27 April 2020

You are correct. For example: 1000₹ asset which has five years useful life has 200 depreciation charge per annum. Then, 1000/(365*5)= 0.54794520547 depreciation charge per day. This is also same as 200 per annum. If a year has 261 working days, then depreciation= per day depreciation expense * 261= 143. The main aim of depreciation is to recover the cost of machine within its useful life. So, 200 is a recoverable amount which is better than 143 i.e., 200 tax will be reduced. It depends upon the depreciation policy and how useful life is assessed. If useful life is assessed based on the number of machine hours, then the useful life will increase beyond five years. However, there are other factors like rust, bad working environment like machine is over used in a day which will increase the wear and tear. The depreciation rates double if the machine is operated in double shifts. Finally, considering all of the above, tax authorities request companies to depreciate on an annual basis as per the Companies act 2013.