Differentiating Depreciation Methods

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Differentiating Depreciation Methods Henry, Lwanga ACC/230 01/26/2012 Renata, Milton The process of depreciation is a method of allocation the cost of long-lived assets. The original cost less any estimated residual value at the end of the asset’s life is spread over the expected life of the asset. Although the total amount of depreciation over the asset’s life is the same regardless of the method used, the rate of depreciation varies. There are three common methods of depreciations used in the accounting industry each with a different procedure; straight line depreciation method, the accelerated depreciation method and the units-of-production depreciation method. The straight-line method spreads the expense evenly by periods and the accelerated methods yield higher depreciation expense in the early years of an asset’s useful life and lower depreciation expense in the later years while the units-of-production method, bases depreciation expense for a given period on actual use. Companies use different depreciation methods for tax reporting and financial reporting because every company has a different asset quality and the depreciation on those assets for each company depreciates differently so it is up to the management to be discrete to which choice of depreciation to use in their reporting in respect to their fixed assets. Straight Line method: Advantage: 1) Straight-line method allows for more “income smoothing". 2) It allows company to show more book value of the asset which increases the value of the company. Disadvantages: 1) benefit of Tax deduction is availed late. 2) In practical, annual benefit from the asset’s use decreases with age Accelerated method: Advantage: 1) This method allows more tax deduction in early years 2) As asset depreciates faster, future expenses in the upkeep of the asset also decreases. 3) This method

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