Accounting - Nature of use
Nature of use
The nature of use for an asset differs considerably. The use creates a
revenue pattern and the method of depreciation chosen should match that
pattern. For instance, if an asset generates revenue evenly over its life
then the straight line method may be regard as appropriate.
Straight line method of depreciation involves the equal allocation of
depreciation expense to each reporting period. This method is simple to
calculate and assumes that a non-current asset contributes equally to
revenue in each reporting period. It may be allocated on the basis of time.
However, should it generate more revenue in the early years, then the
diminishing balance method may be more suitable.
Diminishing balance method allocates greater amounts of depreciation in
the earlier years of an asset's life. This method is used where assets
generate greater revenue in the earlier years of the asset life. Some
assets are more efficient in those early years. If the asset requires time
consuming maintenance in later years then this is a reason for using the
diminishing balance approach. Fear of the asset becoming obsolete is
another reason for the use of this method.
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