Session 11 - Advantages and Disadvantages of Depreciation

Session Plan : Advantages and Disadvantages of Depreciation

1️⃣ 0–5 min: Introduce the concept of depreciation and its role in accounting.
2️⃣ 5–15 min: Discuss advantages of providing depreciation with practical examples.
3️⃣ 15–30 min: Explain disadvantages or limitations of depreciation methods.
4️⃣ 30–40 min: Illustrate effects on financial statements through examples.
5️⃣ 40–45 min: Recap and reinforce learning with 5 important questions.

Lecture Material : (PDF, PPT)

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

Depreciation Methods: Advantages and Disadvantages

1. Straight-Line Method (SLM)

Advantages:

• Simplicity: Easy to calculate and apply.

• Predictability: Provides consistent depreciation expense over the asset's useful life, aiding in budgeting and forecasting.

• Widely Accepted: Commonly used for financial reporting and tax purposes.

Disadvantages:

• Ignores Usage Variations: Assumes uniform asset usage, which may not reflect actual wear and tear.

• Potential Overstatement: May overstate asset value in the early years if the asset depreciates faster.

• Not Suitable for All Assets: Less appropriate for assets that lose value more rapidly in the initial years, such as vehicles or technology.

2. Declining Balance Method

Advantages:

• Accelerated Depreciation: Allocates higher depreciation in the earlier years, matching the asset's usage pattern.

• Tax Deferral: Lowers taxable income more in the initial years, deferring tax liabilities.

Disadvantages:

• Complex Calculation: Requires more detailed calculations compared to SLM.

• Decreasing Depreciation: Depreciation expense decreases over time, which may not align with actual asset usage.

3. Units of Production Method

Advantages:

• Usage-Based: Aligns depreciation with actual asset usage, providing a realistic expense allocation.

• Fair Reporting: Suitable for assets whose value depends on output, such as manufacturing equipment.

Disadvantages:

• Complexity: Requires detailed tracking of usage or production data, which may be time-consuming.

• Variable Expense: Depreciation fluctuates, making budgeting and financial forecasting less predictable.

4. Sum-of-the-Years'-Digits Method

Advantages:

• Accelerated Depreciation: Front-loads depreciation expenses, reflecting higher utility in earlier years.

• Tax Benefits: Provides higher deductions in the initial years, reducing taxable income.

Disadvantages:

• Complex Calculation: Involves more intricate computations compared to SLM.

• Decreasing Depreciation: Depreciation expense decreases over time, which may not align with actual asset usage.

(Q2) : Video Based Content (Youtube)

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform)