Question

Compare the similarities and differences between the three depreciation methods which are Straight-line, Declining-balance and Units-of-activity.

Answer 1

Similarities:

1) The total amount of depreciation charged under all the method become same at the end of the asset's useful life.

2) The residual value of the asset remain same at the end of the useful life under all the methods.

Differences:

1) Under straight line method, depreciation is charged at a constant rate on the depreciable cost of the asset. Under declining balance method, rate of depreciation is applied on the book value of the asset. Under units of activity, the rate of depreciation per unit is multiplied with the level of activity given for each year.

2) The amount of depreciation stays same each year under straight line method. The amount of depreciation keeps on declining under declining balance method. The amount of depreciation depends on the no. of units produced under units of activity method.