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Haseeb, Management Accountant
Category: Finance
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Experience:  CMA
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What are the differences among valuation, depreciation, amortization, and depletion? Is it appropriate to calculate depreciation using two different methods? Explain why or why not. Which depreciation method provides you with the highest depreciation expense in the first year? Explain why. When might a company want the highest depreciation expenses possible? When might a company want the lowest depreciation expenses possible?



Thanks for your question.


Valuation mean the asset (investments or inventories) should be recorded and disclosed at current market price regardless of whether price is above or below cost.


Depreciation mean the allocation of the cost of asset (or tangible asset) to the periods in which services are received from the asset.


Amortization mean the systematic write-off / charged to expense of the cost of an intangible asset over the periods of its economic usefulness.


Depletion mean the pro rata allocation of cost of minerals or natural resources to the units removed or occurred units. It computed by dividing the cost of the natural resources by the estimated available number of units.


Companies are most widely use method of calculating depreciation is the Straight line method, for maintaining books of accounts and this method works as, an equal portion of the cost of an asset is allocated to each period of use. But for income tax purpose accelerated method of depreciation is used, because it provides opportunity to the businessmen to writing off as depreciation expense a large portion of the cost of a new asset during its first year. So if any company not using accelerated method of depreciation that means they are using two different methods of depreciation, one for accounting purpose and another for income tax purpose.


Your question is which depreciation method provides highest depreciation expense in the first year, answer is:

Accelerated method or double declining method of depreciation provides relatively large amounts of depreciation in the early years of use and correspondinly reduced amount in the later years.


Your question is why we use the method of depreciation which provides highest amount of depreciation, answer is

Due to increasingly pace of invention of new products is making obsolescence factor of much greater than physical deterioration.


When company wants highest amount of depreciation expense,

  1. To offset the increase of repair expenses when asset grow older.
  2. To recovered the cost of asset within short period of years.

When company wants lowest amount of depreciation expense,

  1. To charge the equal amount of depreciation on estimated useful life.
  2. When usage of an asset is fairly uniform from year to year.

Hope this help you.




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