fractional amortization method

Written Content of 2500 words on Straight-Line Method of Depreciation Straight-Line Method of Depreciation Introduction The straight-line method of depreciation is one of the most widely used and accepted depreciation methods. When using the straight-line method of depreciation, the total amount of depreciation expense is spread evenly over the life of the asset being depreciated. Advantages and Disadvantages of Straight-Line Depreciation One of the key advantages of the straight-line method of depreciation is its simplicity. This method does not require any complicated calculations. It also encourages consistency when computing depreciation as the same amount is used for each period of the assets life. Furthermore, this method does not require the use of assumptions about residual values, making it easier for a company to accurately predict its long-term depreciation expenses. However, the straight-line method of depreciation does have some drawbacks. One of the main drawbacks is that this method does not provide a reflection of the economic value of the asset over its useful life. For example, an asset may be worth more at the end of its useful life than at the beginning. Although the straight-line method of depreciation does not reflect these changes in asset value, other methods such as the double-declining balance method, do. And finally, the straight-line method of depreciation has no mechanism to revert any excess expenses if the asset is sold in the middle of its economic life. In such cases, the excess depreciation expenses become a sunk cost and cannot be recovered. How the Straight-Line Method of Depreciation Works The straight-line method of depreciation is computed by taking the total cost of the asset minus the estimated salvage value, and dividing it by the estimated useful life span of that asset. The calculation is as follows: [(Total Cost of Asset - Estimated Salvage Value) / Estimated Life Span of Asset] = Depreciation Expense For example, let us assume that a company purchased a machine for $5,000 with an estimated salvaged value of $500 at the end of its five-year useful life span. Using the straight- line method of depreciation, the depreciation expense for each year would be calculated as follows: [(5,000 - 500) / 5] = $900 in depreciation expenses every year. This means that $900 is the total amount of depreciation expenses that are allocated to the asset every year and deducted from the companys taxable income. Conclusion The straight-line method of depreciation is a widely accepted and used depreciation method accounting and financial statements. Due to its simplicity and practicality, it is widely used in accounting and financial statements. It is easy to calculate and encourages consistency when computing depreciation expenses. Although this method does not accurately reflect the economic value of the asset over its useful life, it is the most widely accepted depreciation method and is an important tool in preparing financial statements.