STRAIGHT LINE DEPRECIATION VS REDUCING BALANCE DEPRECIATION —SIMILARITIES AND DIFFERENCES

Straight line depreciation is a method of depreciation where the value of an asset is reduced uniformly untill the asset reaches its scrap value.

It is a depreciation method where the annual depreciation expense of an asset is the same untill the asset reaches its scrap value.

Reducing balance depreciation, on the other hand, is a depreciation method where an asset is depreciated at a fixed proportion of its book value.

In other words, reducing balance depreciation is a form of depreciation in which asset is depreciated as a fixed percentage of the book value of the asset.

The similarities and differences between straight line depreciation and reducing balance depreciation are discussed in this post.

Similarities Between Straight-line depreciation and Reducing balance depreciation.

1. Both are based on time: Both straight line and declining balance depreciation are time-based, as opposed to usage-based.

This is due to the fact that, regardless of whether the asset is used or not, both methods of depreciation charge depreciation annually.

2. Both charges a fixed percentage: Both straight line depreciation and reducing balance depreciation charges a fixed percentage throughout the asset useful years.

However, while straight line depreciation charges fixed percentage on the asset's cost, reducing balance depreciation charges fixed percentage on the book value of the asset.

Differences Between Straight Line depreciation and Reducing Balance depreciation

1. In straight line depreciation, a fixed percentage is charged on the asset's cost whereas in reducing balance depreciation, a fixed percentage is charged on the asset's book value.

2. The depreciation amount is fixed in each of the asset's useful life in straight line depreciation whereas the depreciation amount is not fixed in reducing balance depreciation.

Rather, the depreciation amount decreases from year to year in reducing balance depreciation

3. Straight life depreciation is a constant method of depreciation, with the depreciation charge remaining constant over the course of each accounting period

In contrast, reducing balance depreciation is an accelerated method of depreciation whereby high depreciation is charged on the early years of an asset and low depreciation is charged on the latter years of an asset.

4. In straight line depreciation, an asset's book value is equal to its scrap value at the end of its useful life, or zero if there is no scrap value.

However, for reducing balance depreciation, it is very unlikely, but not impossible, that the book value of an asset will equal its scrap value or zero if the asset has no scrap value at the end of its usable years. value 

To put it in another way, while assets are completely written off in straight line depreciation, assets are unlikely to be written off in reducing balance depreciation.

5. Straight line depreciation is fairly and easy to calculate when compared to reducing balance depreciation.

On the other hand, reducing balance depreciation is relatively difficult and complex to calculate when compared to straight-line depreciation.

6. Reducing balance depreciation is allowable for income tax purposes, but straight line depreciation is not.

7.  Straight line depreciation gets its name from the way it appears on a graph—it is a straight line.

On the other hand, reducing balance depreciation is not represented as a straight line on the graph.

8. Straight line depreciation is also called fixed installments depreciation whereas reducing balance depreciation is also called declining balance depreciation, written down value depreciation or diminishing balance depreciation.

RELATED POST: DOUBLE DECLINING DEPRECIATION (EXAMPLE, ADVANTAGES AND DISADVANTAGES)

Tabular Comparisons Between Straight line depreciation and Reducing balance depreciation

Features/depreciation methodStraight line depreciationReducing balance depreciation
MeaningStraight line depreciation is a method of depreciation where an asset is depreciated uniformly throughout its useful years.Reducing balance depreciation is a depreciation method where the an asset is depreciated based on the current book value of the  asset.
Depreciation amountFixed throughout the asset useful yearsThe depreciation amount keep on decreasing throughout the asset useful years
Representation on a graphStraight lineNot a straight line
Is it applicable to income tax purposesNoYes
Depreciable valueCompletely exhausted as the value of the asset will equal its scrap value or zero at the end of its useful yearsNot Completely exhausted as it is unlikely that the value of the asset will equal its scrap value or zero at the end of its useful years
Calculated asDepreciable value divided by useful yearsDepreciation rate times book value of asset
Type of depreciation methodConstant methodAccelerated method
Time based?YesYes
Usage based?NoNo
Another name for itFixed instalments depreciationDeclining balance depreciation, diminishing balance depreciation or written down value depreciation
Ease of calculationVery easyNot very easy

The major difference between straight line depreciation and reducing balance depreciation is that straight line depreciation charges a fixed percentage on the asset's cost while reducing balance depreciation charges a fixed percentage on the book value of the asset.

The similarities between straight line depreciation and reducing is that both are based on time, rather than usage. 

Rather than number of output produced or working hours of the asset, straight line depreciation and reducing balance depreciation charges only on the number of years that the asset have been used.

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