Depreciation: Straight-Line Vs. Double-Declining
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Depreciation: Straight-Line Vs. Double-Declining
According to the generally accepted accounting principles (GAAP), cash is used to purchase a long-lived asset such as a trailer used in the transport of goods. However, the expenditure incurred when the value of the asset reduces during the useful lifetime of the asset is not captured as an expense against revenue at the time of using the asset. Depreciation is the steady reduction in the value of an asset over its useful lifetime and accountants regard it as an expense as the asset helps to generate revenue. Straight-line and double-declining approaches are similar on one hand because both are methods of calculating depreciation that companies use to represent more accurate financial health. They both use the cost value of an asset and the salvage value to determine depreciation. Both methods are founded on assumptions, which if changed, greater or lesser effects arise on the company’s apparent financial health such as the value of long-term assets and the results of short-term earnings. Such assumptions include the lifetime of the asset and its worth at the end of the assumed lifetime (Salvage) (Investopedia, 2013).
Despite the above similarities, Straight-line and double-declining approaches differ significantly. Straight-line depreciation is calculated as a constant annual expense throughout the lifetime of the asset. In that case, the depreciation is arrived at using the following formula:
Depreciation per year =
For instance, we may assume a trailer that cost $100,000 to have a lifetime of 10 years and a salvage value of $10,000. The depreciation per year for the Trailer =
= $9,000 per year.
Double declining depreciation, as opposed to straight-line depreciation, accelerates and records a larger expense in the earlier years while the depreciation expense becomes smaller in later years (Investopedia, 2013). That is despite the cost and the salvage values being the same as in the example above for straight-line depreciation. For example, the depreciation using a double-declining method on the semi-trailer above can be calculated at 20% of year/’s beginning book value. In that case, the depreciation in the first 3 years would be $20,000, $16000 and $12,800 respectively.