ACC 230 WEEK 2: Differentiating Depreciation Methods: Straight-Line vs. Accelerated Depreciation
Comparison of straight-line and accelerated depreciation methods in accounting.
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ACC 230 WEEK 2: Differentiating Depreciation Methods: Straight-Line vs.
Accelerated Depreciation
ACC 230 WEEK 2
CheckPoint: Differentiating Depreciation Methods
· Resource: Ch. 2 of Understanding Financial Statements
· Due Date: Day 4 [Individual forum]
· Compose a 200- to 300-word response to question 2.4 on p. 74 (Ch. 2). In addition,
include a summary of the advantages and disadvantages of using different depreciation
methods (straight-line versus accelerated).
Discuss and differentiate straight line method of depreciation and accelerated method.
Depreciable assets lose value with time because of wear and tear, aging and obsolescence.This loss in
value of tangible assets with time is called depreciation.
Straight line depreciation method is most commonly used. In this method,charges are spread evenly
over the useful life of the asset.Depreciation charged every year in this method is constant. This allows
for more income smoothing where income has gradual change over useful life of the asset without dips
and highs.
Accelerated method of depreciation assumes that an asset is used heavily during the early years of its
useful life and loses most of its value during first few years of use.In this method, in early years there will
be heavy depreciation. Depreciation decreases with time and by the end of useful life of the asset,
depreciation becomes zero. So, this method lacks constant expense over time. However,since
depreciation is deducted from income for tax reporting,accelerated method allows larger
tax deduction in early years that improves profit. Although straight line method will also provide same
amount of tax deduction in later years, because of time value of money, tax saving in early years is
better for the company.
Why do companies use different depreciation methods for tax reporting and financial reporting?
For financial reporting purpose, Straight line method is used because it resembles the benefit derived
from the asset and actual loss in value of the asset with time.Since straight line method charges less
depreciation as compared to accelerated method in early years, book value of the asset remains higher
Accelerated Depreciation
ACC 230 WEEK 2
CheckPoint: Differentiating Depreciation Methods
· Resource: Ch. 2 of Understanding Financial Statements
· Due Date: Day 4 [Individual forum]
· Compose a 200- to 300-word response to question 2.4 on p. 74 (Ch. 2). In addition,
include a summary of the advantages and disadvantages of using different depreciation
methods (straight-line versus accelerated).
Discuss and differentiate straight line method of depreciation and accelerated method.
Depreciable assets lose value with time because of wear and tear, aging and obsolescence.This loss in
value of tangible assets with time is called depreciation.
Straight line depreciation method is most commonly used. In this method,charges are spread evenly
over the useful life of the asset.Depreciation charged every year in this method is constant. This allows
for more income smoothing where income has gradual change over useful life of the asset without dips
and highs.
Accelerated method of depreciation assumes that an asset is used heavily during the early years of its
useful life and loses most of its value during first few years of use.In this method, in early years there will
be heavy depreciation. Depreciation decreases with time and by the end of useful life of the asset,
depreciation becomes zero. So, this method lacks constant expense over time. However,since
depreciation is deducted from income for tax reporting,accelerated method allows larger
tax deduction in early years that improves profit. Although straight line method will also provide same
amount of tax deduction in later years, because of time value of money, tax saving in early years is
better for the company.
Why do companies use different depreciation methods for tax reporting and financial reporting?
For financial reporting purpose, Straight line method is used because it resembles the benefit derived
from the asset and actual loss in value of the asset with time.Since straight line method charges less
depreciation as compared to accelerated method in early years, book value of the asset remains higher
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Document Details
University
Hult International Business School
Subject
Accounting