Impact of using different types of Depreciation Methods

There are different types of depreciation methods such as straight line depreciation, reducing balance depreciation, sum of the year digit depreciation and units of activity depreciation. Each method has its own impact and individual pros and cons. In straight line method of depreciation the same amount of depreciation is charged over the entire useful life of asset such as machinery or equipment. In reducing balance method the depreciation rate also reduces constantly along with the reduction of the useful life of the asset. In sum of the year’s method the depreciation charge reduces at a constant rate with each passing year. The unit of activity method calculates the depreciation on the basis of the units produce or the level of activity that occurred on the machine or the equipment.

Straight line method is easy and simple to use and is best to use where the pattern of economic benefits of the asset are hard to figure out accurately. It is mostly used for the assets that provide same kind of economic benefits throughout their useful life such as buildings etc. The disadvantage of this method is that it does not provide a precise depreciation expense if the economic benefits are not clear.

The reducing balance method is useful when the usefulness of the asset is declining with its usage such as IT equipments, software etc. however the disadvantage of this method is that the rate of the depreciation may swing over the passing years. Sum of the year’s method is most easy to understand however it is most difficult to calculate so it is often avoided by the accountants. The unit of activity method of calculating depreciation is the most accurate method in terms of identifying the economics of benefits. However it is a bit difficult to calculate if the actual rate of activity is not determined.

Other Related Accounting Articles:

• Basic Factors of Determination of Depreciation
• Fixed Installment Method or Straight Line Method or Original Cost Method of Depreciation
• Sum of Year‘s Digit Depreciation Method
• Depreciation Accounting – General Questions and Answers
• Difference Between Depreciation and Fluctuation
• Basis of Use System of Depreciation
• Depletion Method of Depreciation
• Accounting For Depreciation
• Sum of the Years’ Digits Method of Depreciation
• Depreciation Methods