Straight-Line vs. Units of Production Depreciation
- Depreciation methods affect how businesses report asset values and profitability.
- Choosing the right method is essential for accurate financial reporting and decision-making.
- This section evaluates both straight-line depreciation and units of production depreciation, comparing their strengths, weaknesses, and applications.
Try and recall the definition of depreciation.
Evaluating Straight-Line Depreciation
- Straight-line depreciation is widely used due to its simplicity and consistency, but its assumptions can lead to inaccuracies.
- Business use it because:
- It enables predictable annual expenses aid budgeting and financial planning.
- It complies with accounting standards and regulatory expectations.
- It's best suited for assets with steady usage and long lifespans (e.g., buildings, office furniture).
- However, it can also overvalue assets that depreciate rapidly in early years (e.g., vehicles, electronics) and ignore varying levels of asset usage, potentially distorting profitability.
A retail company using straight-line depreciation for delivery trucks might misrepresent their value, as wear and tear is higher in initial years than later years.
