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Why and why not choose various methods of depriciation for Financial purposes?

Subject

Business

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Study Guide

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Factors Affecting the Depreciation Methods of Companies for
financial purposes:
A company is free to adopt the most appropriate depreciation method for its business operations. Financial theory suggests
that companies use a depreciation method that closely reflects the operations' economic circumstances. So, companies can
choose a method that allocates asset cost to accounting periods according to benefits received from the use of the asset.
Most companies use the straight-line method for financial purposes, but they may also use different methods for
different assets. The most important criteria to follow: Use a depreciation method that allocates asset cost to accounting
periods in a systematic and rational manner.
Depreciation Methods That a Company Could Use:
When choosing a depreciation method for your business, you have to consider the tax implications. If you would rather have a
bigger tax deduction in the near-term, using a double-declining balance method or the sum of the years method might make more
sense. If you would rather just spread out the tax deduction evenly, it makes sense to use the straight-line depreciation method.
You could even use one method on certain items and another on different items.
Why and why not use one method of depreciation:
When you run a small business, depreciating your equipment can help offset the purchase costs through tax savings. Depending on
your business structure and your preference, one method may be the best choice for your situation.
It is acceptable and common for companies to depreciate its plant assets by using the straight line method on its financial
statements, while using an accelerated method on its income tax return.
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Factors Affecting the Depreciation Methods of Companies for financial purposes:A company is free to adopt the most appropriate depreciation method for its business operations. Financial theory suggests that companies use a depreciation method that closely reflects the operations' economic circumsta ...
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