Question

Week 6: Straight Line Method and Accelerated Depreciation

Respond to the question below: Explain the difference between the straight-line method of depreciation and accelerated depreciation. When might each be used? How is the sum of the years digits method derived?

Answer 1

Straight Line Depreciation method:

This is the easiest method for calculating the depreciation. In this method the value of asset is depreciated over the useful life of the assets.

This can be calculated using the following formula:

Depreciation = Depreciable cost / useful life

Here,

Depreciable Cost = Initial Cost – Salvage Value

Accelerated Depreciation method:

Accelerated Depreciation method allows greater deduction in the earlier year. This method allows the deduction of higher expense in the first year and lower deduction at the later years.

There are various methods of Accelerated Depreciation:

a) Double declining balance:

In this method useful life of the assets is reciprocal and doubled and the same is applied in the book value of the assets. For e.g. If there is an asset with useful life of 5 years it would have a reciprocal value of 1/5 = 20%. Double the rate i.e. 40% is charged to the assets value.

b) Sum of Years digit

This is another method of Accelerated Depreciation. In this method we combine all the digits of expected life of the assets.

Let us take an example for derivation of this method:

If the expected life of an asset is 5 years, the sum of the years' digits is calculated by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated in each year.

Years	Workings	Rate of depreciation
1	5/15	33%
2	4/15	27%
3	3/15	20%
4	2/15	13%
5	1/15	7%

In the above example we can see that there is higher rate of depreciation in the earlier years.

The benefits which is obtained by using the assets gets declined over the period so as per this method the depreciation is charged at a higher rate in the initial years.

Q When might each be used?

Straight line method:

If uniform impact in Profit and loss account need to be given the same can be used as in this method the asset is uniformly depreciated, and it does not cause the variation in the Profit or loss due to depreciation expense.

Accelerated Depreciation method:

Accelerated Depreciation method allows greater deduction in the earlier year. This method of depreciation is used to minimize the taxable income at an early stage.

Q) How is the sum of the years digits method derived?

Ans- The same has already been discussed above.

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