Features and Differences – Straight Line and Reducing Balance Methods:
Straight Line Method:
(1) Depreciation rate and amount remain the same in each year of asset’s life.
(2) Depreciation rate (%) is always applied on original cost of asset.
(3) Straight line depreciation method is relatively easy and simple to use.
(4) The asset’s value is reduced to zero or scrap value at the end of its useful life.
(5) This method is best rated for those assets, which provide equal benefit to the business for each year of their useful lives. Examples include building and furniture.
(6) The annual cost of repairs increases as the asset gets older whereas the annual depreciation charge remains constant. Hence, the total of income statement charge on account of depreciation and repairs increases every year which reduces annual profit progressively.
Reducing Balance Method:
(1) Depreciation rate remains constant however the annual depreciation charge reduces each year.
(2) depreciation rate (%) is applied on reduced (book) value of asset.
(3) Calculation of depreciation is not as easy and simple as is under reducing balance method.
(4) The asset’s value is never reduced to zero even at the end of useful life.
(5) This method is very useful for calculating depreciation on assets, which operate faster, produce more, incur low maintenance costs and perform more accurately when they are new. Typical examples could be machinery, vehicles, etc.
(6) The annual cost of repairs increases as the asset gets older, whereas the annual depreciation charge decreases each year. Hence, the total income statement charge on account of depreciation and repairs remains more or less the same each year so will not affect annual profit/loss in a significant manner during the assets’s life.