Question

IV. Explain the need and importance of providing
Depreciation. Discuss and illustrate Straight Line
Method of Depreciation.
10
SECTION—INI

Answer 1

An Example of straight line depreciation?

Say you buy a car for $50,000. After all you can afford to buy expensive cars , right?

Enough bad humour. So you expect the car will last 20 years. After all you are going to take care of your new car as if it were your baby.

Next divide $50,000 by 20 to get $2,500 per year. Each year you will depreciate your car by declaring $2,500 as an expense on your income report.

So there you have it. To calculate straight line depreciation divide the purchase price by the number of years you expect to use your car. Oh, by the way, this method works for other depreciable assets as well.