For declining balance depreciation, business owners can take advantage of higher depreciation charges in the earlier years. True False
The correct answer and explanation is:
True
In declining balance depreciation, business owners can take advantage of higher depreciation charges in the earlier years of an asset’s life. This method is an accelerated depreciation technique, meaning it allows for more depreciation expense to be deducted in the earlier years compared to the later years.
The declining balance method calculates depreciation by applying a constant percentage rate to the asset’s book value at the beginning of each year. Unlike the straight-line method, which spreads depreciation evenly over the asset’s useful life, the declining balance method results in larger depreciation expenses in the earlier years. Over time, these expenses decrease as the book value of the asset reduces.
For example, if an asset costs $10,000 and is depreciated using a 20% declining balance method, the first year’s depreciation would be $2,000 (20% of $10,000). In the second year, the depreciation is calculated on the new book value, which is $8,000 (after subtracting the first year’s depreciation), so the depreciation expense would be $1,600. This pattern continues, with depreciation decreasing each year as the asset’s book value diminishes.
This method can be beneficial for businesses that want to maximize their deductions in the early years of an asset’s life, which can be especially useful for tax purposes. However, it is important to note that declining balance depreciation does not account for any potential residual value of the asset, and the asset will be depreciated until it reaches the residual value or is fully depreciated.
In summary, declining balance depreciation allows businesses to benefit from higher depreciation expenses early on, which can help reduce taxable income in those years.