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Methods Of Depreciation Essay

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Depreciation is a method of allocating the cost of a tangible asset over its useful economic life. Depreciation also means that loss value of an asset due to the unfavourable market conditions. Other definition of depreciation is a non-cash expense that decreases the value of an asset.
Why depreciation happen? There are four reasons that have make depreciation happen. One of the reasons is wear and tear. When the more noncurrent asset that we used, the noncurrent asset will wear out. For example, motor vehicle is known as noncurrent asset. If we use the van have more delivery, the van will wear out very fast, the tyres and the van component also need to repairs. Obsolescence is also a reason for depreciation. Obsolescence means that out of …show more content…

First method is straight line method. Sometimes it also known as fixed instalment method. Straight line method is the simplest and most common used method. This method is calculated by taking the purchase or acquisition cost of an asset, subtracting the residual value and dividing by the estimated useful life of an asset. Residual value is estimated amount of an asset and it will be worth at the end of its useful life. Below is formula of straight line …show more content…

Many companies use two or more methods for depreciation and it also acceptable. For example, companies calculate its noncurrent assets by using the straight line method on its financial statements, while using an accelerated method on its income tax return. However, the method that most popular for companies is straight line method. Straight line method is most widely used due to it is simple to calculate and easy to understand. When apply this method, a company charges same amount of the value of asset for each accounting period. In addition, when apply this this method, same amount is charged as depreciation so that firm can make comparison of company profit for a several year. Furthermore, straight line method is suitable for less expensive assets such as furniture because it can be written off within the estimated useful life of an asset. Although straight line method is popular for companies, on the other hand this method also have disadvantage. This method assumes that the amount of depreciation of an asset is same over its useful life. Straight method also may not give an exact measure of the loss in value or decrease in useful

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