“Would the use of accelerated method – Diminishing balance method of deprecation in the financial statements (Income statement and Balance sheet) be more conservative or less conservative than the current practice of using the straight-line method?” Briefly explain.
Idea Solution:-
Use of accelerated depreciation methods in the financial statements would be more “conservative” than the current practice of straight-line depreciation. Accelerated methods more quickly transfer the costs of plant assets to expense. Thus, in the immediate future, accelerated depreciation methods produce more conservative (lower) balance sheet valuations of plant assets and more conservative (lower) measurements of net income.
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Diminishing Balance method is used to deduct more in the initial stage at the name of "depreciation". It is the advantage of this method that the amount kept as accumulation may be used as working capital and other productive matters.
ReplyDeleteStraight line method charge equal depreciation each year and it is more conservative method of depreciation than that of diminishing balance method.
If you are starting a new business in which you expect losses or low income at the start, accelerated MACRS may waste depreciation deductions that could be used in later years when your income increases.
Therefore, before deciding to use accelerated
or diminishing balance method, consider your income prospects.