Discuss the merits and demerits of providing depreciation by straight line method
Answers
Answer:
Explanation:
Straight Line method has certain advantages which are stated below:
• It is very simple, easy to understand and apply. Simplicity makes it a
popular method in practice;
• Asset can be depreciated upto the net scrap value or zero value. Therefore,
this method makes it possible to distribute full depreciable cost over useful
life of the asset;
• Every year, same amount is charged as depreciation in profit and loss
account. This makes comparison of profits for different years easy;
• This method is suitable for those assets whose useful life can be estimated
accurately and where the use of the asset is consistent from year to year
such as leasehold buildings.
Limitations :-
• This method is based on the faulty assumption of same amount of the utility
of an asset in different accounting years;
• With the passage of time, work efficiency of the asset decreases and repair
and maintenance expense increases. Hence, under this method, the total
amount charged against profit on account of depreciation and repair taken
together, will not be uniform throughout the life of the asset, rather it will
keep on increasing from year to year