Differentiating Depreciation Methods

Differentiating Depreciation Methods

Most large companies have to purchase buildings, machinery, vehicles, furniture, and equipment in order to operate year to year. The value of these assets deteriorates, during the span of the assets useful life, causing depreciation. Companies are given an income tax deduction in order to recover the cost of these assets. There are a few different methods that can be used in order to calculate depreciation. Two of these methods are the straight-line method of depreciation and the accelerated method of depreciation.

The straight-line method of depreciation is most commonly used by companies due to its simplicity. The straight-line method allows companies to spread depreciation expense evenly over the asset's useful life. An advantage of using this method is that a company knows exactly how money that it will save on its asset each year. Another advantage is that the accountant does not have to calculate depreciation expenses at the end of each the accounting year. A disadvantage of the straight-line method is that it does not account for the loss of efficiency or the repair costs of an asset as it becomes older. According to “Yourbusiness.com”,(2015), “If you use assets as collateral for loans, the lender will assume your assets lose more of their value in their first years, so your straight-line method will make the asset look more valuable on your books than it really is for the lender”(). Despite the disadvantages, a company would use the straight-line method in their financial statements to maximize net income. The higher net income will make the company more valuable to investors’.

Unlike the straight-line method, the accelerated method allows companies to write off their assets faster in the earlier years of an asset’s use-full life. The advantage

Differentiating Depreciation Methods

of this method is that the company will pay fewer taxes. Paying fewer taxes leaves the company more available cash to use for...