Accounting in Business 2: Depreciation Methods Analysis and Selection

This assignment delves into the realm of accounting, specifically focusing on depreciation methods used to determine the cost of assets that lose value over time. Using the Atwater Manufacturing Company as a case study, the paper examines three primary depreciation methods: the straight-line method, the productive output method, and the sum of the years’ digit method. It provides a detailed description of each method, including how they are calculated and their respective advantages and disadvantages. The analysis culminates in a recommendation for the most suitable method for Atwater Manufacturing, justifying the selection based on its ability to accurately reflect the declining value of the machine over its lifespan. The paper concludes with a list of references to support the analysis.

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Running Head: Accounting in Business
ACCOUNTING IN BUSINESS

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Accounting in Business
Table of Contents
Description.......................................................................................................................................2
The straight-line method..................................................................................................................2
The productive output method.........................................................................................................2
The sum of the years’ digit method.................................................................................................2
Arguments for and against...............................................................................................................2
Selected method...............................................................................................................................3
References........................................................................................................................................5

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Accounting in Business
Description
The method of depreciation is used to determine costs for the products or assets that are likely to
lose value over time (Sigidov et al. 2016). In the case of the Atwater Manufacturing Company,
the new machine acts as the asset for which a cost needs to be set that will be dependent on its
usage and benefit throughout their life.
The straight-line method
In this method, the scrap value of the asset at the end of its life is deducted from its original
value. Scrap value refers to the value of the physical components of the machine when it is no
longer usable. The value after subtracting is divided by the number of years the machine is
expected to be of service.
The productive output method
This method uses the number of units produced by the machines in a year to account for its
productivity. It is used when the machine or the assets are more directly involved in the
production of goods.
The sum of the years’ digit method
In this method, the most amount of depreciation is associated with the product in its initial years
when the asset is in maximum use. This way can account for the rate of high depreciation in the
later years and the high productivity in the earlier years.
Arguments for and against
Method of depreciation Advantages Disadvantages
The straight-line method This method will allow the
company to calculate the asset
However, the process of
depreciation is not

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Accounting in Business
value easily. streamlined (Gissel, 2016).
The machine may be more
productive in the initial years
than in the later years. This
method does not
accommodate this
discrepancy.
The productive output
method
The method is certainly
beneficial to the scenario
presented as the machine used
in the assembly line.
Even in this method, the value
of depreciation is considered
to be the same throughout the
years.
The sum of the years’ digit
method
This is the only method that
allows the company to
understand how the asset is
going to accurately decline
through the years. This
accelerated decline will help
the company to reduce its
taxable income.
However, the calculation
involved in this method is
difficult than others (Liapis &
Kantianis, 2015).
Selected method
Depreciation expense = (Remaining life of the asset/ Sum of the year’s in numeric) *
Depreciable Cost
The sum of the years’ digit method was found to be the most suitable for the Atwater
Manufacturing Company. This method uses acknowledges that the decline of the machine
quality is accelerated and is represented in its worth (Del Giudice, Manganelli & De Paola,
2016). The other methods assume the depreciation or decline to be uniform throughout the years.
This way the earnings of the company appear to be more then what they are and the companies

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Accounting in Business
have to pay more tax than necessary. If this method is used, then the income appears to be less in
the initial years as the asset value is greater. The situation reverses itself as the machine ages and
the asset value decreases.

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Accounting in Business
References
Del Giudice, V., Manganelli, B., & De Paola, P. (2016). Depreciation methods for firm’s assets.
In International Conference on Computational Science and Its Applications (pp. 214-
227). Springer, Cham.
Gissel, J. L. (2016). A case of fixed asset accounting: Initial and subsequent measurement.
Journal of Accounting Education, 37, 61-66.
Liapis, K. J., & Kantianis, D. D. (2015). Depreciation methods and life-cycle costing (LCC)
methodology. Procedia Economics and Finance, 19, 314-324.
Sigidov, Y. I., Rybyantseva, M. S., Adamenko, A. A., & Yarushkina, E. A. (2016).
Methodological aspects of depreciation as an economic category. International Journal
of Economics and Financial Issues, 6(1S), 88-95.