Question

What are the major factors considered in determining what depreciation method to use?

Short answer

Answer

From a conceptual point of view, the method that best matches revenue and expenses should be used.

Step-by-step solution

Meaning of Depreciation

Depreciation is an accounting procedure that is used to know the exact value of the asset as time passes and the asset becomes absolute. A company has different options for analyzing depreciation, with straight-line method being the most common one.

Explaining the major factors considered in determining what depreciation method to use

From a theoretical standpoint, the technique that best fits income and costs should be utilized; in other words, the solution is determined by the asset's reduction in a service capacity. An expedited procedure will appear to be more desirable if the service potential loss is faster in the early years. If, on the other hand, the fall is more uniform, a straight-line method could be preferable.

For practical reasons, many businesses use depreciation strategies. Since a bigger net income number is displayed on the books in the early years, yet smaller tax is paid to the government, some corporations utilize accelerated techniques for tax reasons, but straight-line for book purposes. Others try to employ the same procedure for tax and accounting purposes since it saves time and money. In some cases, tax policy is also a factor.