Ab113-01-Unit8-Assignment-Edwardjulius Creative Writings Example
Straight-line and double declining depreciation methods
Straight-line depreciation method is a method that assigns an equal amount of depreciation for a fixed asset for each of the years of the asset’s useful life. Under this method, depreciation is determined by dividing the cost of the asset net of salvage value, with the number of years of useful life. In addition, a fixed percentage can be used for each of the years.
Double declining depreciation method is an accelerated depreciation method that assigns more depreciation in the early years of a depreciable asset than in the last years of the asset’s useful life. It assumes that a depreciable asset is used at a higher rate in the early years than in the later years of the asset.
Which method is better?
Both methods have their benefits and constraints. The straight-line method is objective since it assigns the same amount of depreciation in each of the years. In addition, most depreciable assets are utilized at a constant rate during their useful lives. Assigning the same amount of depreciation reflects this fact. However, the method is not reasonable for assets that are not utilized at a constant rate.
Double declining method is only preferable when an asset is not utilized at a fixed rate. It assigns a larger amount in the early years. However, it is constrained by the fact that it overstates expenses in the first years. This reduces profits in the first years and increases profits in the later years of the asset. It may be used to distort company profits and it also results in deferred tax.
Straight-line depreciation method is better for the company to use. This is because most assets are consumed at the same rate hence it is reasonable to assign an equal amount of depreciation during the useful life.