Depreciation Question:
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Explain straight line method to calculate depreciation. What are it advantages and limitations?
Answer:
It is the simplest and most often used technique. The components used to calculate Straight Line Method are:
-Cost of Asset
-Estimated Scrap vale-is the value of the asset at the end of life of the asset
-Estimated life of Asset
Formula to calculate:
Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life of Asset in years
The main advantage of this method is that an equal amount of depreciation is charged every year throughout the life of the Asset which makes the calculation of depreciation easy.
But the limitation of this method is that the amount of depreciation charged on the asset in the later years is high due to the reduced value of the asset.
-Cost of Asset
-Estimated Scrap vale-is the value of the asset at the end of life of the asset
-Estimated life of Asset
Formula to calculate:
Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life of Asset in years
The main advantage of this method is that an equal amount of depreciation is charged every year throughout the life of the Asset which makes the calculation of depreciation easy.
But the limitation of this method is that the amount of depreciation charged on the asset in the later years is high due to the reduced value of the asset.
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