AllBestEssays.com - All Best Essays, Term Papers and Book Report
Search

Depreciation Differences

Essay by   •  September 23, 2012  •  Essay  •  370 Words (2 Pages)  •  1,449 Views

Essay Preview: Depreciation Differences

Report this essay
Page 1 of 2

Even though a company many choose one of multiple methods of depreciating fixed assets, the basic principles and values are still the same. The major difference between methods is illustrated in the rate of depreciation. Three of the more common methods of depreciation are the straight-line method, the accelerated method, and the units-of-production method.

The straight-line method of depreciation is straightforward. Simply put, the depreciation expense is spread evenly over the periods. This method is best for assets that perform continually and consistently and does not work well for other asset items that have unpredictable useful lives. This method is most commonly used for financial reporting and tax reporting because of its simplicity.

The accelerated method records higher depreciation expenses early on in the equipment's useful life and a lower expense later on. This method has several advantages since depreciation expenses are tax deductible. For example, taking larger depreciation expenses early on will allow for a reduction of overall tax debt and possibly even allow the company to defer some tax debt for a period. However, after the accelerated period has ended the full tax balance will come due but it may be easier to pay this since the depreciation expense has decreased also.

The units-of-production method bases the depreciation expense on actual usage of the equipment in that period. This method is very helpful for tax reporting purposes because using this method of depreciation the state will more closely match the federal numbers for depreciation. In addition, for recordkeeping purposes this method is easier because the amount of depreciation is close to the amount of revenue generated by the property. A potential disadvantage of this method could include delays in depreciation due to the asset not being in use.

All of these methods offer their own advantages and disadvantages depending on the company's purpose. Choosing a method for depreciating assets depends on whether the company is trying to minimize income tax or show a more accurate picture of company's position. The straight-line method is most commonly used for financial reporting because it shows a clear picture while the accelerated methods are useful in tax reporting and minimizing income taxes.

...

...

Download as:   txt (2.3 Kb)   pdf (50.8 Kb)   docx (9.2 Kb)  
Continue for 1 more page »
Only available on AllBestEssays.com
Citation Generator

(2012, 09). Depreciation Differences. AllBestEssays.com. Retrieved 09, 2012, from https://www.allbestessays.com/essay/Depreciation-Differences/32966.html

"Depreciation Differences" AllBestEssays.com. 09 2012. 2012. 09 2012 <https://www.allbestessays.com/essay/Depreciation-Differences/32966.html>.

"Depreciation Differences." AllBestEssays.com. AllBestEssays.com, 09 2012. Web. 09 2012. <https://www.allbestessays.com/essay/Depreciation-Differences/32966.html>.

"Depreciation Differences." AllBestEssays.com. 09, 2012. Accessed 09, 2012. https://www.allbestessays.com/essay/Depreciation-Differences/32966.html.