Question

Over the life of an asset, explain the difference in the effect on the income statement of using straight-line depreciation and an accelerated method of depreciation.

Answer 1

Solution:

Under straight line depreciation method, depreciation is spread out evenly over the life of assets. Therefore every year equal amount shown as depreciation expense in income statement.

Accelerated depreciation is a depreciation method by which an asset value is depreciated at a faster rate than the straight-line method. The most popular method under Accelerated depreciation are double declining balance method and Sum of the Years Digits method. This method allows greater deductions in the earlier years of an asset.

From above, under straight line depreciation equal amount charged in income statement as depreciation expense every year. However under accelerated depreciation method, depreciation expense is higher in earlier years and later reduced over the life of assets.