Question

What is the difference between the straight-line method and the diminishing balance method?

Answer 1

The difference between the straight-line method of depreciation and the diminishing balance method of depreciation is as follows:

BASIS OF DIFFERENTIATION	STRAIGHT-LINE METHOD	DIMINISHING BALANCE METHOD
Calculation Easy or Difficult	It is easy to calculate the rate of depreciation.	It is difficult to calculate the rate of depreciation.
Tax Purposes	This method is not applicable for income tax purposes.	This method is applicable for income tax purposes.
Suitability	This method is suitable for those assets in relation to which (a) repair charges are less (b) the possibilities of obsolescence are less.	The method is suitable for those assets in relation to which (a) the amount of re-repairs and renewals goes on increasing as the assets grow older and (b) the possibilities of obsolescence are more.
Book Value	The book value of the asset becomes zero or equal to its scrap value.	The book value of the asset does not become zero.
Calculation of Depreciation	Depreciation is calculated at a fixed percentage on the original cost of the asset.	Depreciation is calculated on the reducing balance of assets.
Amount of Depreciation	An equal amount of depreciation is charged every year.	The amount of depreciation goes on reducing year after year.

Also see:

• MCQs on Depreciation
• What Is Depreciation?