How can a chosen depreciation method increase or decrease income?

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Expert Solution

There are many methods of computng Depreciation for a corporate entity or assets. The 2 methods of calculating depreciation which are most followed are:-

1) Straight line method

2) Written down value method

Under straight line method, an asset is depreciated equally over its useful life. For example, if an asset costs $100,000 and its useful life is 10 years with zero salvage value then depreciation will be $10, 000 per annum

Under Written down value method, an asset is depreciated on a fixed percent basis on the written down value of each year over its useful life. For example, if an asset costs $100,000 and the rate of depreciation is 10% then depreciation will be $10,000 ($100,000 * 10%) for first year and on balance $90,000 (i.e $100,000-$10,000), depreciation for year 2 will be calculated which will be $9,000 (i.e $90,000*10%).

Thus, under Written down value method, high depreciation is charged in initial years which keeps on declining in coming years. This leads to low profit in initial years (due to high depreciation) and vice versa

Whereas, under Straight line method, same amount of depreciation is charged every year. Thus it has no impact on increase or decrease in profit

jeff jeffy answered 1 year ago

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