Comparing Depreciation Methods

16.5
COMPARING
DEPRECIATION METHODS

© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 A business purchased a vehicle with the following details:
 Cost = $32,000
 Estimated useful life = 4 years
 Estimated residual value = $12,800
 The firm is debating which depreciation
16.5 COMPARING DEPRECIATION METHODS
Reducing Balance
Depreciation
@ 20%
Straight-Line
Depreciation or

 Cost = $32,000
Straight-Line
Depreciation Expense
=
ResidualCost -
Useful Life
= $4,800
=
12,80032,000 -
4
Year Depreciation
Accumulated
Depreciation
Carrying
Value
Year Depreciation
Accumulated
Depreciation
Carrying
Value
1 4,800 4,800 27,200
Year Depreciation
Accumulated
Depreciation
Carrying
Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
Year Depreciation
Accumulated
Depreciation
Carrying
Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
Year Depreciation
Accumulated
Depreciation
Carrying
Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
4 4,800 19,200 12,800
Straight-Line Depreciation

 Cost = $32,000
Reducing Balance
@ 20%= Carrying Value
at end of period
Reducing Balance
Depreciation Expense x
Reducing Balance Depreciation
@ 20%
Depreciation Expense Accumulated Depreciation Carrying Value
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600
2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480
3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384
4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107

Cost
$32,000
$4,800
Carrying
Value
$27,200
Carrying
Value
$22,400
Carrying
Value
$17,600
Straight-line depreciation…
$4,800 $4,800
0 1 2 3 4
$4,800
Carrying
Value
$12,800
Cost
$32,000
32,000 x 20% =
$6,400
Carrying
Value
$25,600
Carrying
Value
$20,480
Carrying
Value
$16,384
Reducing balance depreciation…
0 1 2 3 4
Carrying
Value
$13,107
25,600 x 20% =
$5,120
20,480 x 20% =
$4,096
16,384 x 20% =
$3,277

 Comparison…
Reducing Balance
Depreciation
@ 20%
Straight-Line
Depreciation
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
4 4,800 19,200 12,800
Total 19,200
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 6,400 6,400 25,600
2 5,120 11,520 20,480
3 4,096 15,616 16,384
4 3,277 18,892 13,107
Total 18,893
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
4 4,800 19,200 12,800
Total 19,200
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 6,400 6,400 25,600
2 5,120 11,520 20,480
3 4,096 15,616 16,384
4 3,277 18,892 13,107
Total 18,893
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
4 4,800 19,200 12,800
Total 19,200
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 6,400 6,400 25,600
2 5,120 11,520 20,480
3 4,096 15,616 16,384
4 3,277 18,892 13,107
Total 18,893
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
4 4,800 19,200 12,800
Total 19,200
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 6,400 6,400 25,600
2 5,120 11,520 20,480
3 4,096 15,616 16,384
4 3,277 18,892 13,107
Total 18,893
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
4 4,800 19,200 12,800
Total 19,200
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 6,400 6,400 25,600
2 5,120 11,520 20,480
3 4,096 15,616 16,384
4 3,277 18,892 13,107
Total 18,893
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 4,800 4,800 27,200
2 4,800 9,600 22,400
3 4,800 14,400 17,600
4 4,800 19,200 12,800
Total 19,200
Year Depreciation
Accumulated
Depreciation
Carrying Value
1 6,400 6,400 25,600
2 5,120 11,520 20,480
3 4,096 15,616 16,384
4 3,277 18,892 13,107
Total 18,893

Comparison…
 Straight-line
charges the same
amount of
depreciation each
period
 Reducing-balance
charges more
depreciation in the
earlier periods
 Reducing-balance
depreciation
decreases as the
asset gets older
4,800 4,800 4,800 4,800
6,400
5,120
4,096
3,277
Year 1 Year 2 Year 3 Year 4
Depreciation Expense
Straight-Line Reducing-Balance

4,800
9,600
14,400
19,200
6,400
11,520
15,616
18,892
Accumulated Depreciation
Comparison…
 Both methods end
up charging the
same (or similar)
amount of
depreciation at the
end of the asset’s
useful life
 But:
 Reducing balance
charges more at
the start of the
asset’s life
 Reducing balance
charges less at
the end of the
asset’s useful life

27,200
22,400
17,600
12,800
25,600
20,480
16,384
13,107
Carrying Value
Comparison…
 Both methods end
up with the same
(or similar) carrying
value at the end of
the asset’s useful
life
 The asset is more
valuable in the
Balance Sheet in
the early years
under the straight-
line method

 Which depreciation method should a business choose?
 The method selected should be the one that best satisfies…
Reporting Period Principle:
• Pick the method that best matches the amount of
depreciation to the amount of revenue generated each
period
Relevance:
• Pick the method that calculate the most accurate profit
so good decisions can be made
• This will be the method which best matches the revenue
earned by the asset with the depreciation incurred

 To do this, the revenue generating pattern of each asset must be
analysed
Reducing Balance
Depreciation
Straight-Line
Depreciation
used when…
used when…
The asset has the same revenue
earning capacity over its entire useful
life
The asset earns more revenue in its
earlier years than in its later years

 If the asset generates the same revenue throughout its life then
straight-line depreciation will best match revenues and expenses
 If the asset generates the more revenue in its early years then
reducing-balance depreciation will best match revenues and expenses
2015 2016 2017
Revenue = $10,000 Revenue = $10,000 Revenue = $10,000
Depreciation = $2,000- Depreciation = $2,000- Depreciation = $2,000-
2015 2016 2017
Revenue = $25,000 Revenue = $17,500 Revenue = $10,000
Depreciation = $10,000- Depreciation = $7,000- Depreciation = $5,000-

 In the real world…

TASK
In-class Homework
SQ3 X
SQ4 X
SQ5 X
SQ6 X
SQ8 X
SQ9 X
SQ10 X

Comparing Depreciation Methods

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