Question

What are the advantages and limitations of straight line and diminishing balance methods?

Answer 1

The following are the advantages of the Straight Line method:

1. It is simple to understand and apply.
2. Asset value can be made zero value at the end of useful life.
3. The asset value can be completely written off using this method.
4. It is useful for those assets whose usage is made on a constant basis and the useful life of the asset can be determined easily.
5. It is easier to compare profits as an equal amount of depreciation is charged every year.

Following are the limitations of the Straight Line method:

1. It ignores the actual use of the asset.
2. It does not consider the loss of interest received for the amount invested in the asset.
3. It does not take into consideration that the depreciation on the asset will be more as it becomes old.

Advantages of the Diminishing Balance method:

1. This method is considered relevant for income tax purposes.
2. Under this method of depreciation, higher depreciation is calculated in the initial years with matching revenue generated during the initial years. Similarly, when the asset becomes less productive at the end of its useful life, the depreciation charged is less.

Limitations of Diminishing Balance method:

1. The assets cannot be completely written off using the diminishing balance method.
2. The rate of depreciation cannot be determined appropriately.
3. The actual use of assets is not taken into account.

Also read:

• True and False Questions on Depreciation
• What Is Depreciation
• MCQs on Depreciation

Learn about more questions and answers on business studies and various other commerce topics from our website.