Straight Line vs Diminishing Balance Method

Straight Line Method :

  • Amount of Depreciation: Equal amount of depreciation is charged every Year
  • Calculation of depreciation: Depreciation is calculated at a fixed percentage on the original cost of the asset.
  • Book value: The book value of the as-set become zero or equal to its scrap value.
  • Suitability: This method is suitable for those assets in relation to which (a) repair charges are less (b) the’ possibilities of obsolescence is less.
  • Calculation Easy or difficult: It is easy to calculate the rate of depreciation.
  • Tax Purposes: This method is not applicable for income tax purposes.

Diminishing Balance Method :

  • Amount of Depreciation: The amount of depreciation goes on reducing year after year.
  • Calculation of depreciation: Depreciation is calculated on the reducing Balance of asset.
  • Book value: The book value of the asset does not became zero.
  • Suitability:  The method is suitable for those assets in relation to which (a) the amount of re-repairs and renewals goes on increasing-ing as the assets grow older and (4) the possibilities of obsolescence are more.
  • Calculation Easy or difficult: It is difficult to calculate the rate of depreciation.
  • Tax Purposes: This method is applicable for income tax purposes.

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