An analysis of the Depreciation Methods in GAAP in the UK

An analysis of the derogation Methods in GAAP in the UKdisparagement is the storage allocation of the woo of a plant asset to expense over its reclaimable (service) life in a rational and systematic manner (Weygandt, Kieso and Kimmel, 2003416). in that location are three factors affect the calculation of wear and tear, which are asset cost, utilizable life and unbosom economic hold dear (Weygandt, Kieso and Kimmel, 2003). Accountant in different companies go away procedure various manners to compute the wear and tear. There are straight-line mode, trim isotropy rule (double declining fit, pairing of digits, reducing percentage), annuity mode acting, and unit of achievement method (Mike, Ron and Allister, 1994). And in most companies, especially in the large corporations, they will function the straight-line method, because it is the easiest one to compute the disparagement. This look for will exemplify some method that usually utilise in the companies and co ntract with each method to draw out which one is the most effective. At the beginning, the essay will illust rove the straight-line method, the second one is reducing difference method, the third method is sum of digits, and the last one is the unit of business method. Below each method, the essay will give an example, which is calculated by me.Under the straight-line method, the course of instruction parole dispraise expense is the same over the assets estimated useful life every year. The annual disparagement expense is determined by dispraise cost split by the useful life of the asset or multiplied by the annual rate of disparagement (Weygandt, Kieso and Kimmel, 2003). mannikin 1An asset be 11,000, its anticipate write entertain is 1,000, its estimated useful life is 5 days.Depreciable cost =11,000-1,000 =10,000Annual depreciation expense =10,000/5years=2,000ORAnnual rate of depreciation =100%5years=20%Annual depreciation expense =10,000*20%=2,000 social class 1 Cos t 11,000Depreciation 2,000 stratum 2 winnings book pry 9,000Depreciation 2,000 course of study 3 utmost book value 7,000Depreciation 2,000 category 4 Net book value 5,000Depreciation 2,000 division 5 Net book value 3,000Depreciation 2,000Net book value 1,000The straight-line method is the simplest way among all the methods it sui set back for the use of asset is unvarying during the useful life it is popular used by large corporation, such as Campbell Soup, Marriott Corporation and General Mills.However, the reducing proportionality method has a falling depreciation amount every year during the useful life of the asset. The changing depreciation is depended on the book value (cost less accumulated depreciation). It is calculated to figure the book value at the beginning of the year and the reducing balance depreciation rate (Weygandt, Kieso and Kimmel, 2003).Example 2An asset costs (book value at the beginning of year) 11,000, its expected salvage value is 1,000, its estimated useful life is 5 years.Reducing balance depreciation rate = 100%5years=20%* Calculation of 901.12(4505.6-20%) is adjusted to 3505.6 in order to make the book value equal salvage value (Weygandt, Kieso and Kimmel, 2003).Sum of digits is anformer(a) kind of reducing balance method, which has the closest familiarity with useful life and salvage value of the asset. The depreciation cost is multiply depreciation cost (asset cost less salvage value) by digits of each year (Mike, Ron and Allister, 1994).Example 3An asset costs 11,000, its expected salvage value is 1,000, its estimated useful life is 5 yearsThe digits add up is 1+2+3+4+5=15Depreciation cost =11,000-1,000=10,000Year 1 Cost 11,000Depreciation (5/15-10,000) 3,333Year 2 Net book value 7,667Depreciation (4/15-10,000) 2,667Year 3 Net book value 5,000Depreciation (3/15-10,000) 2,000Year 4 Net book value 3,000Depreciation (2/15-10,000) 1,333Year 5 Net book value 1,667Depreciation (1/15-10,000) 667Net book value 1,000The double dec lining balance method is very kindred to the educing balance method. It just doubles the reducing balance depreciation rate and has the same way to compute the depreciation. Reducing percentage is a method alike to Sum of digits. It gives a fix amount of the asset in advance to write off each year. When attach to use the reducing balance method, it can combine the depreciation expense to the maintaining cost and suffer the asset (Mike, Ron and Allister, 1994). The depreciation charges will large in the primaeval years and become smaller and smaller subsequent.Rather than the time period, the unit of production method write off the asset by expressing the total of units of production. Because it cerebrate to the machines usage and output closely, it is used in extractive corporations popularly (Mike, Ron and Allister, 1994). This method is used by some large corporation, such as ChevronTexaco Corp. and Boise go down Corporation (Weygandt, Kieso and Kimmel, 2003). The depreciat ion expense in this method is determined by depreciation cost per unit multiply by units of activity during the year. The depreciation cost per unit is computed by depreciation cost divide by total units of activity.Example 4Asset costs 11,000, its expected salvage value is 1,000. The manufacture will produce 20,000 produces in the first year, 15,000 produces in the second year, 30,000 produces in the third year, 10,000 produces in the forth year and 25,000 produces in the fifth year.Depreciation cost =11,000-1,000=10,000Depreciation cost per unit=10,000100,000units=0.1To equivalence the three main methods, we find that each method will obligate the same book value in the last year, but the depreciation expense is different during the useful life. The straight-line method keeps same the reducing balance method is large in the early years and decreases in the later years, and the unit of production method is fluctuant bases on the unit it produces.In the SSAP 12, it allows compani onship to decide which depreciation method to use by them. But the company must consider if the method they choose is suitable for the companies asset, and the depreciation allocated is reasonably to the best of their abilitiesto benefit form the use of the asset (Mike, Ron and Allister, 1994541, paragraph 8 in the explanatory note section of SSAP12). The purpose of all the depreciation methods is the return of the money invested in the asset finally, but different methods bring forth its rate of recovering (Robert, Helen and David, 1978). Companies considerate when their money invest will pay off and the net income.Obviously, the methods talked above can be divided into two categories. star is found on useful life, which is straight-line method and reducing balance method. The other one is base on the number of the production it is unit of production method. So which method is useful will first depend on the way it estimate in the depreciation.Between the straight line method and the reducing balance method. The benefit of the straight-line method is easy to calculate and the depreciation expense will not change every year. While the reducing balance method has a high depreciation in the early years, this will save the income tax during these years because depreciation cost clip the income reported for tax purpose (Robert, Helen and David, 1978). For many company, the money is better to pay back as soon as quickly. The fall in the tax essence there is more money can be used. Also, Robert, Helen and David (1978313) compared the different depreciation methods on a present value discounted from the depreciation expense (see the table blow). They assumed that the money will earn 8% for the company and form the reducing balance method have more present value than the straight-line method.As it mentions above, for a business, if it is based on use for the depreciation, the most useful depreciation method should be unit of production method. And if the compa ny is based on the useful life for the depreciation, the most useful one may be the reducing balance method even though the straight-line method is easy to compute.