Question

what would be the impact on the financial statement if they switched to an accelerated method of depreciation from straight line?

Answer 1

Following will be the impact on the financial statements if we switched to an accelerated method of depreciation from straight line;

1. In starting years net profits shown by the income statement will be lower if we switched to an accelerated method of depreciation from straight line. It is because of higher amount of depreciation charged under accelerated method of depreciation. As we know that under straight line method an equal amount of depreciation is charged through out the life of assets wheras in case of accelerated method of depreciation, higher amount of depreciation is charged in starting years.

That is why income statement will show lower amount of net income in starting years wheras higher amount of net income will be shown in later years.

2. In starting years value of assets shown in balance sheet will be lower if we switched to an accelerated method of depreciation from straight line due to higher amount of depreciation charged under accelerated method of depreciation. Wheras in later years value of assets shown in balance sheet will be higher if we switched to an accelerated method of depreciation from straight line due to less amount of depreciation charged under accelerated method of depreciation in later years.