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More to depreciation in the early years than in later

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more to depreciation in the early years, than in later years.Another argument in favor of an accelerated method is that repair (maintenance) expenseAnother argument in favor of an accelerated method is that repair (maintenance) expenseis likely to be greater in later years than in early years. Thus, the reduced amounts ofis likely to be greater in later years than in early years. Thus, the reduced amounts ofdepreciation reported in later years of the asset’s life are offset to some extent bydepreciation reported in later years of the asset’s life are offset to some extent byincreased repair (maintenance) expense.increased repair (maintenance) expense.A visual comparison may provide a better understanding of the three-depreciationA visual comparison may provide a better understanding of the three-depreciationmethods disc ribe above. Figure 4-1 compares the yearly depreciation under the fourmethods disc ribe above. Figure 4-1 compares the yearly depreciation under the fourmethods.methods.300300Graphical Comparison of three methodsGraphical Comparison of three methodsofofYearlyYearly25002500determining depreciationdetermining depreciationDepreciationDepreciation200015001500100010005005001122334444
In the above graph that shows yearly depreciation, straight-line depreciation is uniform atBirr 1375 per year over the four years period. However, the declining balance methodbegins at an amount greater than straight line (Br.3000) and decreases each year toamounts that are less than straight line (ultimately, Br. 250). The production method doesnot generate a regular pattern because of the random fluctuation of the depreciation fromyear to year. In general companies use different methods of deprecation for goods reason.The straight-line method can be advantageous for financial reporting because it canproduce the highest net income, and the accelerated depreciation method can bebeneficial for tax purposes because it can result in lower income taxes.4.8 RECORDING DEPRECIATION4.8 RECORDING DEPRECIATIONThe amount by which a fixed asset decreases is an expense of the business. The amountThe amount by which a fixed asset decreases is an expense of the business. The amountof depreciation expense should be recorded each fiscal period. If depreciation expense isof depreciation expense should be recorded each fiscal period. If depreciation expense isnot recorded, the income statement will not contain all the expenses of the business. Thisnot recorded, the income statement will not contain all the expenses of the business. Thiswill cause the net income to be reported higher than it should be. Income tax laws allow awill cause the net income to be reported higher than it should be. Income tax laws allow abusiness to deduct depreciation as an expense in determining net income. If depreciationbusiness to deduct depreciation as an expense in determining net income. If depreciationexpenses are not included on the income tax reports, the business will pay more incomeexpenses are not included on the income tax reports, the business will pay more incometaxes than it should be.

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