Question

Why would a company use the sum-of-the-year or declining-balance method over the straight line method to calculate depreciation?

Answer 1

There can be two reasons:

1. Showing the accurate value of asset - The most important reason to use the declining balance method is that company can know the more accurate value of the asset for company. Most assets lose their value in initial year and lesser in later year so decreasing balance method give more accurate value for this kind of assets than straight line method.

2. Saving Taxes in initial years - companies use the sum-of-the-year or declining-balance method over the straight line method because in sum-of-the-year or declining-balance method, the depreciation is much higher I the initial years as compared to later years. If depreciation expense is more in initial ears, the profit will be less and taxes will also be less.

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