sorry I have another question...
now that both depreciation methods can be tested on, what would be a good answer if we were asked how they were linked to consistency or comparability?
I think the key to answering a question involving both depreciation methods is the following:
- Explain current method being used by the business and briefly define it
- Assess whether the current method attempts to accurately match revenues earned against expenses incurred (i.e. talk about the revenue earning pattern of the asset and whether this is reflected by the current method of depreciation)
- Discuss alternative methods and why it may be better or worse by linking to APs and QCs (For example: if it was a photocopier operating on s/line and being changed to reducing balance, this may more accurately match revenues earned against expenses incurred through recognising depreciation expense of the photocopier in such a way that mirrors its contribution to revenue. This is because photocopiers are generally more efficient at the start of their useful lives and require more maintenance and become less efficient towards the end of their useful lives. This is best reflected by the reducing balance method of depreciation as it allocates more depreciation at the start of the asset's useful life than at the end, reflecting the asset's decreasing capacity to generate revenue. Thereby, this best matches revenues earned against expenses incurred under the accrual system of accounting, thus abiding by the Reporting Period principle. Moreover, because it offers a fairer reflection of the depletion of the photocopier's economic benefit, this improves the usefulness of accounting reports for decision-making, thereby facilitating the achievement of the qualitative characteristic of Relevance)
- Consistency/comparability: If we change methods too much, what are the implications? Does this limit or ability to compare existing accounting reports to past performance?
Those are just a few things to consider
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