Question

Why do think the most common method of measuring an asset’s life is by years? What are the advantages/disadvantages of using straight-line, units of production or double-declining balance method?

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Answer 1

Yes, The most common method of Measuring Asset life is by years. as per Accounting Standard company has to estimate the asset life to the best possible by analysing all factors, unless other method is more appropriate for depreciation.

Accounting Standard board has already mentioned specific life of an asset in the Accounting standard schedule. Company can vary the life of an asset other than mentioned in schedules by giving proper disclosure and nature extent and timing for the same.

Hence, it is easy for Comapny to follow the standard and schedules unless the conditions are different as those mentioned in schedule.

Advantages and Disadvantages of SLM Method:

Advantages are Simple Method, Appropriate for Small business, Depreciation wil remain same for all years. Asset will be discharged off completely. SLM method cannot be adopted for asset with long term, Provisioning of Replcaement is difficult in this method. SLM method cause complete pressure on last year.

Advantages and Disadvantages of Depreciation on Units of production basis.

Applicability of method is on Assets where asset loss its capacity and accordingly proportionate to the assets wear and tear. it means wear and tear in Asset connected with the production activity of the machine. Allocation of Depreciation is easy over the time, Matching concept is easily applied in this method of depreciation. Knowing the facts about its Disadvantage, Production Capacity utilisation measuring on precise basis is itself a challenge. Remaining Idle of Asset , Maintenance of records of prodcution takes place, all are to be recorded in very precise manner.

Advantages and disadvantages of Double declining Method: It is method of depreciation which don't take into account Salvage Value. Depreciation is Charged higher in starting years and lower at later stage. It reduces the tax obligations as due to higher deduction, Disadvantages are Value never reduced to zero, and complex in nature of its applicability.