VCE Accounting Unit 4

1. 16.3
LIMITATIONS OF STRAIGHT-
LINE DEPRECIATION

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 But is this true of all assets?
 Do all assets earn the same amount of revenue throughout their
useful lives?
 Are all assets used (consumed) at the same rate throughout
their useful lives?
16.3 LIMITATIONS OF STRAIGHT-
LINE DEPRECIATION
Straight-Line Depreciation Method
• A method of depreciation which allocates the same amount of
depreciation each reporting period
• Assumes the asset generates the same revenue and is used
(consumed) the same amount each and every period

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Comparison…
16.3 LIMITATIONS OF STRAIGHT-
LINE DEPRECIATION
Vehicles MachineryEquipment
Shop fittings Display
equipment
Office furniture

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Applying straight-line depreciation to these assets would not
be appropriate because:
 They are more efficient at generating revenue in their early
years compared to their final years
 They cost more to use as they get older, e.g.
 They require servicing
 Repairs need to be made
 They break down and can’t be used to earn revenue
 The become less reliable and less efficient
 Their market value drops significantly over time, e.g. vehicles,
equipment
16.3 LIMITATIONS OF STRAIGHT-
LINE DEPRECIATION

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 For example, it was assumed earlier that a delivery van could earn
the same amount of revenue during its 3 years of use…
2015 2016 2017
Revenue = $25,000 Revenue = $25,000 Revenue = $25,000
Depreciation = $10,000-
Net Profit = $15,000=
Depreciation = $10,000-
Net Profit = $15,000=
Depreciation = $10,000-
Net Profit = $15,000=
Revenue = $25,000 Revenue = $17,500 Revenue = $10,000
Depreciation = $10,000-
Net Profit = $15,000=
Depreciation = $10,000-
Net Profit = $7,500=
Depreciation = $10,000-
Net Profit = $0=
Revenue = $25,000 Revenue = $25,000
16.3 LIMITATIONS OF STRAIGHT-
LINE DEPRECIATION

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 In reality, as the van got older, it would have generated less revenue each
period as:
 Servicing was required
 Repairs were needed
 It was off the road for servicing and repairs
 It uses more petrol and shows signs of wear-and-tear
 A better depreciation method would charge a less depreciation as the asset
gets older…
 This method is called…
2015 2016 2017
Revenue = $25,000 Revenue = $17,500 Revenue = $10,000
Depreciation = $10,000-
Net Profit = $15,000=
Depreciation = $7,000-
Net Profit = $10,500=
Depreciation = $5,000-
Net Profit = $5,000=
Reducing Balance Depreciation
16.3 LIMITATIONS OF STRAIGHT-
LINE DEPRECIATION