Question

Explain the different depreciation methods and what factors might affect a company’s decision in choosing a method to use in their financial reporting.

Answer 1

Depreciation is a process of allocation of value of reduction in its asset throughout its life. It can be calculated through different methods such as-

1 . Straight line depreciation method-this type of depreciation method estimate the total life of an asset and then divide the overall value of the asset by total period of its life directly and the depreciation is allocated equally over its lifetime.

2. Accelerated depreciation method-this type of depreciation is calculated on the leftover value after deduction of previous depreciation. This type of depreciation generally deduct the previous amount of depreciation from the total cost available and then follows the same until the values becomes completely Nil.

there are various types of factors which affect the choice of method of depreciation by a company-

A. Legal provisions must be considered before determination of the rate of depreciation for the company.

B. Technological advancement should also be considered because certain technology requires high rate of depreciation and can only be done through a straight line.

C . Managerial decisions are also important while deciding upon the method of depreciation.

D. Rate of inflation should also be considered while deciding about which method of depreciation should be used.