The main difference between the reducing balance and straight-line methods of depreciation is that while the reducing balance method charges depreciation as a percentage of an asset’s book value, the straight-line method expenses the same amount each year.

What is the difference between fixed installment method and diminishing balance method?

Depreciation is charged on the original cost of assets in fixed installment method. In reducing balance method, depreciation is charged on the book value of asset. The amount of depreciation is the same in each year over the life of assets in fixed installment method.

What are the advantages and limitations of straight line and diminishing balance method?

Advantages and disadvantages of straight-line depreciation method

• Simplicity.
• Assets can be written off completely.
• Total depreciation charge is known.
• Suitable for small businesses.
• Useful for assets of lesser value.
• Pressure on final years.
• Does not have the provision of replacement.
• Interest loss.

What is the other name of fixed installment method?

The straight-line method of depreciation is the most simple and easy to use depreciation method. It is the most commonly used method of depreciation. It is also called the Original cost method, Fixed Installment method or Equal Installment method.

What is another name of diminishing balance method?

Reducing Balance Method
According to the Diminishing Balance Method, depreciation is charged at a fixed percentage on the book value of the asset. As the book value reduces every year, it is also known as the Reducing Balance Method or Written-down Value Method.

How do you calculate diminishing balance method?

With the diminishing balance method, depreciation is calculated as a percentage on the book value of the tangible asset. The book value is the real value of the asset. The real value of the asset is the cost price minus the depreciation written off to date.

What are the advantages of diminishing balance method?

Advantages of Diminishing or Reducing Balance Method:

• It is a simple and easy method.
• Every year, there is an equal burden for using the asset.
• The obsolescence problem gives due care since the major part of the depreciation charges in earlier years and the management may find it easy to replace the asset.

What is the disadvantage of straight line method?

Disadvantages Of Straight Line Method Of Depreciation It ignores the decreasing efficiency of the assets with the passage of time. So, it is completely based on the faulty assumption. Deducted amount of depreciation under this method is not invested or utilized outside the company.

How do you calculate diminishing value?

Diminishing value It is calculated by dividing 200% by an asset’s useful life in years (150% if the asset was held before 10 May 2006). For example, the diminishing value depreciation rate for an asset expected to last four years is 37.5%.

What are the advantages and disadvantages of diminishing balance method?

1. This method charges heavy amount of depreciation in earlier years, and it cannot reduce the book value of a fixed asset to zero if it is desired. 2. It requires high rate of depreciation on fixed assets otherwise it will take a long time to write the asset down to its residual value.

What are the demerits of diminishing balance method?

Disadvantages Of Diminishing Balance Method Of Depreciation

• Not Suitable For All Assets. Diminishing balance method of provision of depreciation is not suitable or applicable for less valued assets having short life.
• Loss Of Interest.
• Higher Rate.
• Book Value.
• Difficulty In Calculation.