Differentiating Depreciation Methods

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Straight-line method of depreciation is where the depreciation is charged as long as you have an asset. However, an accelerated method of depreciation is where the depreciation that you have charged the amount will decline over a period of time. In straight-line method in order for you to get the depreciation amount the asset is subtracted from its cost. In the mean time, accelerated method is charged in the beginning of the life time but in the end it is charged less.

The formula that is used for straight-line method of depreciation is depreciation equal to cost minus salvage value over life in number of periods. In accelerated method the formula for declining balance is depreciation equal depreciation rate time book value of asset. Then the depreciation rate equal accelerator time straight-line rate. Companies use different depreciation methods for financial reporting because they have to follow rules relating to taxes when reporting tax depreciation. When they used tax depreciation on accelerated method is because of the different declining balance methods.

Financial reporting in straight-line method has declining balance methods with multiples rates. A company use different depreciation methods because of the different classes of assets. Straight-line advantage is as it ages it determine the value of the business assets. The disadvantage in straight-line is that the rate may not depreciate the same every year. The disadvantage of accelerated method is that it can calculate a higher depreciation charge. The advantage is the tax benefit to the company because of the time-value of money.

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