Short Answer
There is no single depreciation method that is always better. The choice depends on the type of asset and how it is used in the business. Different methods are suitable for different situations.
The Straight Line Method is better for assets that give equal benefit every year, while the Written Down Value Method is better for assets that lose more value in the early years. The best method is the one that shows the true value and correct profit.
Detailed Explanation:
Best method of depreciation
No fixed best method
In accounting, there is no one method that can be called the best for all situations. The choice of depreciation method depends on the nature of the asset, its usage, and the business requirements.
Each method has its own advantages and limitations. Therefore, a method is considered better only when it suits the asset and provides accurate financial information.
Straight line method suitability
The Straight Line Method is better for assets that are used evenly over time. These assets provide equal benefit every year, so charging equal depreciation is logical.
Examples include buildings, furniture, and office equipment. This method is simple and easy to understand. It also helps in maintaining stable profit every year because the depreciation expense remains constant.
Businesses that prefer simplicity and consistency often choose this method.
Written down value method suitability
The Written Down Value Method is better for assets that lose more value in the early years. These include machines, vehicles, and equipment.
Such assets are more efficient when new and require more maintenance as they get older. This method charges higher depreciation in the beginning and lower later, which matches the actual usage and performance of the asset.
It is more realistic for assets that quickly lose their value.
Matching of cost and revenue
A good depreciation method should match the cost of the asset with the revenue it generates. If an asset produces more income in the early years, a method like Written Down Value is more suitable.
If the income generated is equal every year, the Straight Line Method is more appropriate. Therefore, the best method is the one that follows the matching principle properly.
Impact on financial statements
Different methods affect profit and asset value differently. The Straight Line Method results in equal profit impact every year, while the Written Down Value Method results in varying profit.
Businesses must choose the method that shows a true and fair view of their financial position. The method should not mislead users of financial statements.
Consistency and policy
Once a method is chosen, it should be followed consistently every year. Changing methods frequently can create confusion and affect comparability of financial statements.
Businesses usually select a method based on accounting policies, legal requirements, and the nature of assets.
Importance of choosing correct method
Accurate profit calculation
The right method ensures that profit is calculated correctly and fairly.
Proper asset valuation
It helps in showing the correct value of assets in the balance sheet.
Better decision making
Managers and investors can make better decisions when financial statements are accurate and reliable.
Conclusion
No single depreciation method is always the best. The choice depends on the type of asset and its usage. The Straight Line Method is suitable for equal usage, while the Written Down Value Method is better for assets that lose value quickly. The best method is the one that gives a true and fair view of the financial position.