# Depreciation

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• Study Notes

### Diploma in Business Management & Entrepreneurship - Depreciation

• Topic Reviews
Turkey 09 April 2017
BabaJide Martins F.

The difference between straight line method and diminishing balance method: Straight line method is easier to operate and calcuate whereas diminishing does not.

Equatorial Guinea 09 April 2017
Alice B.

What is the difference between straight line and diminishing balance methods?

South Africa 09 April 2017
Morne V.

In accountancy, depreciation refers to two aspects of the same concept: the decrease in value of assets (fair value depreciation), and the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle).

Nigeria 09 April 2017
Sunday O.

Depreciation

Uganda 09 April 2017
Odongo M.

Accounting -> Depreciation Depreciation Two methods of depreciation are: Straight line method Diminishing balance method The methods differ in valuation and in the impact valuation has on the profit reported and subsequent effect on the balance sheet. The results of the application of the different methods apply in the following ways: Disposal value the straight line method deducts the disposal value of the asset prior to calculation, whereas the diminishing balance method does not Matching costs with revenue the straight line method assumes a consistent return to revenue over the life of the assets diminishing balance assumes the asset earns greater revenue in the earlier years of the asset's life Obsolescence only the diminishing balance method allows for possible obsolescence by attempting to write off the bulk of the asset cost as depreciation in the earlier years of the asset's life Calculation of depreciation the straight line method is most simple to calculate, providing the same amount each year diminishing balance is based on the written down value of the asset and requires deduction of previous accumulated depreciation prior to calculation of depreciation for this accounting period Merits/disadvantages Straight line method simple to operate/calculate does not allow for obsolescence or the premature end of the economic life of the asset helps long term planning as you know what is going to be the amount allocated in future periods to depreciation Diminishing balance method allows for obsolescence enables the recovery of cost of the asset at the earliest opportunity tendency to overstate depreciation (and therefore understate profit) in the early years of the asset life

Nepal 08 April 2017
Manish K.

Two types of methods are found out to calculate depreciation: Straight line method and diminishing method. Information regarding depreciation is clearly given. No confusion at all.

Nigeria 08 April 2017

Straight line method is simple to calculate. It help the lay man to understand much better.

United States of America 08 April 2017
Penelope M.

I agree with the straight line method, it says stability., with the diminishing line, means you don't know from day to day, month to month what to expect.

Morocco 08 April 2017

What does depreciation have to do with accounting issues?

United Arab Emirates 08 April 2017
Gloria N.

The methods differ in valuation and in the impact valuation has on the profit reported and subsequent effect on the balance sheet.

• Text Version

### Diploma in Business Management & Entrepreneurship - Depreciation

Accounting - Depreciation

Depreciation

Two methods of depreciation are:

* Straight line method

* Diminishing balance method

Interactive SWF

The methods differ in valuation and in the impact valuation has on the
profit reported and subsequent effect on the balance sheet.

The results of the application of the different methods apply in the
following ways:

Disposal value

* the straight line method deducts the disposal value of the asset prior
to calculation, whereas the diminishing balance method does not

Matching costs with revenue

* the straight line method assumes a consistent return to revenue over
the life of the assets

* diminishing balance assumes the asset earns greater revenue in the
earlier years of the asset\'s life

Obsolescence

* only the diminishing balance method allows for possible obsolescence by
attempting to write off the bulk of the asset cost as depreciation in the
earlier years of the asset\'s life

Calculation of depreciation

* the straight line method is most simple to calculate, providing the
same amount each year

* diminishing balance is based on the written down value of the asset and
requires deduction of previous accumulated depreciation prior to
calculation of depreciation for this accounting period

Straight line method

* simple to operate/calculate

* does not allow for obsolescence or the premature end of the economic
life of the asset

* helps long term planning as you know what is going to be the amount
allocated in future periods to depreciation

Diminishing balance method

* allows for obsolescence

* enables the recovery of cost of the asset at the earliest opportunity

* tendency to overstate depreciation (and therefore understate profit) in
the early years of the asset life

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