Explain the advantages and disadvantages of using the Diminishing or Reducing balance method, fixed percentage on diminishing balance method or written down value method of depreciation of fixed assets

March 14th, 2011 Comments off
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{  Note that the diminishing balance method is also known as the reducing balance method, fixed percentage on diminishing balance method or written down value method of depreciation – see the article on the different methods of depreciation}
 

See earlier article on details of this method.

Below tabulates the advantages and disadvantages of this Diminishing balance method:

Advantages:

  • Amount charged to the profit & loss account towards depreciation and repairs will remain more or less uniform year after year
  • Any addition of fixed asset, there is no need to have fresh calculation unless the purchase is made in the middle of the year
  • Simple to use

 

Disadvantages:

  • Interest lost due to the capital investment in the asset is not taken into account
  • Book value of the asset cannot be brought down to zero
  • Though this method charges uniformly to the profit & loss account year on year, in many cases, this may not happen either due to low rate of depreciation or due to excessively repair charges in later stages.

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Financial Accounting

 
 

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