Explain Straight Line Method To Calculate Depreciation. What Are It Advantages And Limitations?
Answers
Answer:
Explanation: straight line method define:
->A common method of reducing the cost, or purchase price, of assets is straight-line depreciation. This process reduces the cost of an asset by an equal amount each year over the estimated useful life of the asset, typically a number of years. Straight-line depreciation is calculated by dividing the depreciable cost of the asset by the number of years the asset will be used.
->calculate depreciation:
1)Determine the cost of the asset.
2)Subtract the estimated salvage value of the asset from the cost of the asset to get the total depreciable amount.
3)Determine the useful life of the asset.
Advantages
:Straight-line depreciation, also known as the fixed or equal-installment depreciation method, is the simplest and most widespread form of depreciation used by businesses. It is suitable for assets that operate uniformly and consistently over the life of the item. The fixed method is straightforward, uncomplicated, easy to understand and simple to apply. Each year the same amount of money is taken as a depreciable business expense on the company's tax return. Straight-line depreciation is suitable for less expensive items, such as furniture, that can be written off within the asset's defined legal, estimated or commercial life. The IRS sets guidelines for estimating an asset's useful life.
Disadvantages:
Most pieces of office equipment, machinery and other items purchased do not perform exactly the same each year. As assets age they become less efficient. Repair costs usually increase over time. Straight-line depreciation does not account for the loss of efficiency or the increase in repair expenses over the years and is, therefore, not as suitable for costly assets such as plant and equipment. The functional life span of some assets cannot clearly be estimated. The straight-line depreciation method should not be used when the useful life of an asset is unpredictable.