What are differences between Straight - Line and Diminishing Balance Methods of charging depreciation?

Answer 1

The straight line method assumes that the useful life of an asset is evenly distributed to its life, so results in a constant depreciation charge per year provided the estimated residual value remains constant over the life of the asset.

for example,

Asset's value = $100,000

useful life = 10 years

residual value = $20,000

depreciation per year = (100,000 - 20,000)/10

= $8000 per year

The diminishing balance method assumes that the asset is more useful on the early days and less useful in the later days, so it results in more depreciation charge in the early years and the charge decreases as the asset becomes old.

for example,

Asset's value = $100,000

residual value = $20,500

depreciation rate = 10%

useful life = 15 years

depreciation year 1. (100,000 * 10%) = 10,000

depreciation year 2. (100,000 - 10,000 W1) * 10% = 9000

depreciation year 3. (100,000 - 19,000 W2)* 10% = 8100

depreciation year 4. (100,000 - 27,100 W3)* 10% = 7290

W1 = depreciation of year 1

W2 = depreciation of year 1 and year 2 combined

W3 = depreciation of year 1, year 2 and year 3 combined