What are the differences between the Straight Line and Diminishing Balance methods of charging Depreciation?

Q. What are the differences between the Straight Line and Diminishing Balance methods of charging Depreciation?

Top Answer

Solution:

Straight line Method	Diminishing Balance method
1. A fixed amount of depreciation is charged. [Cost of the machine is 5,000; depreciation charged is 500 each year.]	1. A fixed rate of depreciation is charged. [cost of the machine is 8,000; Rtae of Depreciation is 10%. depreciation for the first year is 10% which is equal to 8,00 Balance 7200 2^nd year depreciation 10% – 720 ]
2. The rate of depreciation is the reciprocal of the life of the asset.	2. The rate of depreciation is ascertained by applying a formula.
3. The asset may or may not have any scrap value.	3. The asset should have a scrap value.
4. The amount of depreciation per year does not change.	4. The amount of depreciation per year goes reducing.
5. In the first year the depreciation rate is charged on the cost of assets less scrap value, if any.	5. In the first year the depreciation rate is charged on the cost of the asset (without deducting scrap value).
6. At the end of its life the book value of the assets may become zero.	6. The book of the assets never reduced to Zero.