Straight-Line MethodStraight-Line Method: This is the most commonly used method for calculating depreciation. In order to calculate the value, the difference between the asset's cost and the expected salvage value is divided by the total number of years a company expects to use it.
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What are the 3 factors of computing depreciation?There are three factors to consider when you calculate depreciation, which are noted below.
- Useful Life. This is the time period over which the company expects that the asset will be productive.
- Salvage Value.
- Depreciation Method.
How do you choose a depreciation method?
How to Choose a Depreciation Method
- Straight line depreciation spreads the cost evenly over a number of years.
- Accelerated depreciation writes off a greater portion of the cost in early years and a smaller portion in later years.
- Units of production depreciation writes off an asset as it is actually used.
Why is straight line depreciation the most popular?
Straight line basis is a method of calculating depreciation and amortization, the process of expensing an asset over a longer period of time than when it was purchased. Straight line basis is popular because it is easy to calculate and understand, although it also has several drawbacks.
Which depreciation method is least used?
Straight line depreciationStraight line depreciation is often chosen by default because it is the simplest depreciation method to apply.
Straight line depreciation is often chosen by default because it is the simplest depreciation method to apply. You take the asset's cost, subtract its expected salvage value, divide by the number of years it's expect to last, and deduct the same amount in each year.
Straight-line depreciation is the simplest method for calculating depreciation over time. Under this method, the same amount of depreciation is deducted from the value of an asset for every year of its useful life.
How it works: You divide the cost of an asset, minus its salvage value, over its useful life. That determines how much depreciation you deduct each year.
There are four methods for depreciation: straight line, declining balance, sum-of-the-years' digits, and units of production.
An example of this method is the units of production method. This is the most accurate of the depreciation methods in matching actual usage to the related depreciation expense, but suffers from an inordinate amount of record keeping to track usage levels.
Double-declining-balance because it gives the fastest tax deductions for depreciation. Explanation: The double declining method records a higher amount of depreciation expense in early years which gives companies the fastest tax deductions. This is beneficial since they likely paid for the asset in the early years.
- Simplicity. The straight-line method is the simplest method for calculating depreciation.
- Assets can be Written Off Completely.
- Total Depreciation Charge is Known.
- Suitable for Small Businesses.
- Useful for Assets of Lesser Value.
- Pressure on Final Years.
- Does not have the Provision of Replacement.
- Interest Loss.
Straight line is the most straightforward and easiest method for calculating depreciation. It is most useful when an asset's value decreases steadily over time at around the same rate.
Various Depreciation Methods
- Straight Line Depreciation Method.
- Diminishing Balance Method.
- Sum of Years' Digits Method.
- Double Declining Balance Method.
- Sinking Fund Method.
- Annuity Method.
- Insurance Policy Method.
- Discounted Cash Flow Method.
Methods of Depreciation and How to Calculate Depreciation
- Straight-line method.
- Written down Value method.
- Annuity method.
- Sinking Fund method.
- Production Unit method.
The reducing balance method of depreciation reflects this more accurately than other depreciation methods. On the other hand, straight-line depreciation results in equal depreciation expenses and therefore cannot account for higher levels of productivity and functionality at the beginning of an asset's useful life.
The Straight-Line Method
This method is also the simplest way to calculate depreciation. It results in fewer errors, is the most consistent method, and transitions well from company-prepared statements to tax returns.
Under the Income Tax Act, depreciation is charged against income. There are varying techniques of assessing it, such as straight-line method or written down value method (WDV). The Act recognizes WDV method of depreciating asset, except for establishments involved in generation and/or distribution of power.
The following are the advantages of the Straight Line method: It is simple to understand and apply. Asset value can be made zero value at the end of useful life. The asset value can be completely written off using this method.
Straight-line depreciation does not account for the loss of efficiency or the increase in repair expenses over the years and is, therefore, not as suitable for costly assets such as plant and equipment. The functional life span of some assets cannot clearly be estimated.