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

{  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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