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Differentiating Depreciation Methods

In: Business and Management

Submitted By jamiwilson777
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The straight-line method of depreciation spreads the expense of depreciation evenly over the life of the asset. An advantage of this method is that it is a very straightforward approach and is uncomplicated and easy for users to understand and apply. However a disadvantage is because a company is paying the same depreciation amount every period it does not account for the loss of efficiency or repair expenses that an older piece of equipment may need. This method is commonly used for financial reporting because of it easy process and application.
The accelerated method of depreciation has the company paying higher depreciation expenses in the early life of the asset and lower expenses in the later years. With the accelerated method the company has larger depreciation in early years and will report less profit in early years and more profit in later years. An advantage to this method is the effects on the company’s income tax return. A higher depreciation in early years will mean an immediate income tax saving which is appealing. Another advantage would be offsetting the company’s income and lowering taxes. However this can also be a disadvantage by offsetting their income they have a lower reported income which can make it difficult to gain investors or get a loan from a bank. This method could also cause a company to rush replacement of efficient equipment when the tax benefit slows down. The company would then be replacing perfectly functioning equipment and creating a large purchasing expense before it is needed. Accelerated depreciation method is commonly used for tax reporting in order to benefit from tax savings. It is acceptable for a company to use the straight-line method for financial reporting and also use the accelerated method for tax...

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