Depreciation Methods: Understanding and Applying Accounting Principles

This report delves into the concept of depreciation, which is the reduction in the value of an asset over its useful life, and its significance in accounting and taxation. It explains that depreciation allocates the cost of an asset over its lifespan, impacting a company's taxable income and tax liabilities. The report specifically focuses on two primary depreciation methods: the straight-line method and the units of activity method. The straight-line method depreciates an equal amount of the asset each year, while the units of activity method depreciates based on the asset's output. The report highlights the suitability of each method, with the straight-line method being suitable for assets used regularly and the units of activity method for assets producing a countable output. It concludes by emphasizing the importance of depreciation in financial management, highlighting its role in tax savings and asset valuation.

Running head: MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTING
Name of the Student
Name of the University
Author Note

1MANAGEMENT ACCOUNTING
To,
Larry Lawn,
Address
Date
Subject: Inquiry response
Dear Sir,
Depreciation can be best described as the reduction in the value of an asset throughout its
estimated useful life. In other words, it is the allocation of the cost of the asset throughout its
useful life1. The value of the asset is reduced every year keeping the wear and tear of the asset
in mind. Thus depreciation depicts the amount of usage of the asset in terms of its value.
Business firms depreciates its assets for both accounting as well as tax purposes. For instance,
a tax deduction can be taken by the companies through depreciation that is, depreciation
decreases the taxable income and the company have to pay a lesser tax amount. Here the
useful life is the estimated life span of the asset, salvage value is the estimated resale value of
the asset after the expiration of its useful life. Accumulated depreciation is the summation of
all the depreciation amounts on the particular asset till date and the value that the asset carries
on the balance sheet is the historical value of the asset deducted by the accumulated
depreciation.
1 Li, Wendy CY, and Bronwyn H. Hall. "Depreciation of business R&D capital." Review of
Income and Wealth (2018).

2MANAGEMENT ACCOUNTING
There are many methods of depreciation, but the most popular and widely accepted methods
are the Straight-line method and the units of activity depreciation method. The key
differences between them are as follows:
 In the straight-line method, equal amount of the asset is depreciated every year while
in units of activity, the asset is depreciated on the basis of specific unit of output2.
 Straight-line method is normally used for assets used on a regular basis, year after
year while units of activity method is best suited for assets producing a countable
amount of output.
Thus it can be concluded that, depreciation is the allocation of the cost of the asset throughout
the useful life of the asset which helps the firm in availing tax savings. It has multiple
methods for calculation however, straight-line method is widely accepted and used as it is
easy to understand and calculate.
Thanking you,
Yours sincerely,
Name of the CPA
[CPA].
2 Del Giudice, Vincenzo, Benedetto Manganelli, and Pierfrancesco De Paola. "Depreciation
methods for firm’s assets." International Conference on Computational Science and Its
Applications. Springer, Cham, 2016.

3MANAGEMENT ACCOUNTING
Reference
Del Giudice, Vincenzo, Benedetto Manganelli, and Pierfrancesco De Paola. "Depreciation
methods for firm’s assets." International Conference on Computational Science and Its
Applications. Springer, Cham, 2016.
Li, Wendy CY, and Bronwyn H. Hall. "Depreciation of business R&D capital." Review of
Income and Wealth (2018).