Accounting – 7.2 Accounting policies | e-Consult

The use of different depreciation methods significantly reduces the comparability of financial statements. Straight-line depreciation allocates an equal amount of depreciation expense each year, while reducing balance depreciation allocates a fixed percentage of the remaining book value each year. This means that the depreciation expense reported in the financial statements will differ depending on the method used.

This difference in depreciation expense directly impacts the reported profit and the carrying value of assets. A company using reducing balance depreciation will generally report lower depreciation expense in the early years and higher depreciation expense in the later years compared to a company using straight-line depreciation. This can lead to misleading comparisons of profitability and asset values.

To improve comparability, the company should adopt a consistent depreciation method. This could involve switching to either straight-line or reducing balance depreciation and applying it consistently over the period. The company should clearly disclose the depreciation method used in its notes to the financial statements.