STRAIGHT LINE METHOD

The Straight Line Method of depreciation is also called as Fixed Installment Method or Fixed Percentage on Original Cost Method. In this Straight Line method, each year on every asset an equal amount of money is provided for depreciation until the asset is reduced to nil or its scrap value at the end of the estimated life of the asset.


DIMINISHING BALANCE METHOD

The Diminishing Balance Method is also known as Reducing Installment Method or Written Down Value Method or Declining Balance Method. In this method, The depreciation is calculated at a certain percentage each year on the value of the asset which is brought forward from the previous year.

Introduction:
The original cost method and diminishing value method are two depreciation methods used in accounting to calculate the loss of an asset's value over time. Both methods are used to allocate the cost of an asset over its useful life.

Original Cost Method:
The original cost method, also known as the straight-line method, is a depreciation method that allocates the same amount of depreciation expense each year over the useful life of the asset. Under this method, the depreciation expense is calculated by dividing the cost of the asset by its useful life. The formula for calculating depreciation expense under this method is:

Depreciation Expense = (Cost of Asset - Salvage Value)/Useful Life

Diminishing Value Method:
The diminishing value method, also known as accelerated depreciation, is a depreciation method that allocates a higher amount of depreciation expense in the early years of an asset's useful life and a lower amount in the later years. Under this method, the depreciation expense is calculated by applying a fixed percentage to the book value of the asset each year. The formula for calculating depreciation expense under this method is:

Depreciation Expense = Book Value x Depreciation Rate

Difference:
The main difference between the original cost method and the diminishing value method is the way in which depreciation expense is allocated over the useful life of the asset. The original cost method allocates the same amount of depreciation expense each year, while the diminishing value method allocates a higher amount in the early years and a lower amount in the later years.

Advantages:
The advantages of the original cost method are:
- It is simple and easy to understand.
- It provides a consistent and predictable depreciation expense each year.

The advantages of the diminishing value method are:
- It reflects the actual decline in the asset's value over time.
- It provides a higher depreciation expense in the early years, which can help to offset the higher costs of acquiring the asset.

Disadvantages:
The disadvantages of the original cost method are:
- It does not reflect the actual decline in the asset's value over time.
- It may result in an inaccurate representation of the asset's value on the balance sheet.

The disadvantages of the diminishing value method are:
- It can be complex and difficult to understand.
- It may result in a higher depreciation expense in the early years, which can negatively impact the company's financial statements.