Depreciation methods for accounting

[UncleWai]

Hi, can you guys help me out? My upcoming tutorials I have to talk about depreciation methods. Can you guys give me some pros and cons of the different depreciation methods?

Straight-Line Methods
+ easy to calculate and consistent
+ better for company with continuous growth
- ??? any cons?

Production Methods
+ Match depreciation according to usage
- not applicable to low MC stuff such as computer usage

Double Declining Methods
+ stacking depreciation upfront means lower income tax
+ more conservative
- understating of the later portion of the depreciation



Any other good insights I can add to the list? This is not an advanced accounting course, but a review on financial accounting from the Econ&Finance department.

Thanks.

 

[BrunoPuntzJones]

I prefer double declining and using tax depreciation if possible. That way you don't have to mess with book to tax entries and different methods.

I've personally never seen production method used, but I don't work on many manufacturing folks. But even some big ones I've seen still just use DD.

DB200 is what most stuff gets depreciated at.

 

[fuzzybabybunny]

Originally posted by: UncleWai
Straight-Line Methods
+ easy to calculate and consistent
+ better for company with continuous growth
- ??? any cons? higher income tax

Production and usage Methods - great for things like trucks or automobiles (mileage) or industry equipment (ex. 50,000 hours Mean Time Before Failure (MTBF))
+ Match depreciation according to usage and units of production
- not applicable to low MC stuff such as computer usage


Double Declining Methods
+ stacking depreciation upfront means lower income tax
+ more conservative
- understating of the later portion of the depreciation

 

[SZLiao214]

Hmmmm financial accounting 🙂

After what fuzzy added it looks right.

 

[Canun]

Use Double declining balance if you expect a larger than usual amount of tax in the current year that you are placing assets in service. You will have to figure recapture if you sell the asset.

Use Straight-line if your income is going to be steady.

 

[UncleWai]

The professor said when companies are growing (purchasing more equipments), the double decline-method is a less desired choice. What is the reasoning behind that? I can see how the new purchase equipment depreciation is going to hurt the net income. But at the same time, this means less income taxes and gives the company better cash flow, no?

 

[fuzzybabybunny]

Originally posted by: UncleWai
The professor said when companies are growing (purchasing more equipments), the double decline-method is a less desired choice. What is the reasoning behind that? I can see how the new purchase equipment depreciation is going to hurt the net income. But at the same time, this means less income taxes and gives the company better cash flow, no?

I'm just hazarding a guess, and have the very real possibility of being completely wrong, but maybe depreciating too much at the beginning will make you look weaker to possible investors?

 

[BrunoPuntzJones]

If the business is profitable it could just Sec 179 new assets and expense them all in the current year (up to the amount of income, or 108,000 in additions, there are limitations). So no need for DDB then 😛

Then again Sec 179 is for tax only, not GAAP

 

[spidey07]

I've never seen anything but straight-line used. Easier to budget/track.