Answer to Question #307070 in Accounting for Joel

Question

Liam is struggling to determine which deprecation method he should use for his new silk-screening machine. He expects sales to increase over the next five years. He also expects (hopes) that in two years he will need to buy a second silk-screening machine to keep up with the demand for products of his growing company. Discuss which depreciation method makes more sense for Liam:

• Higher expenses in the first few years, or keeping expenses consistent over time?
• Or would it be better for him to not think in terms of time, but rather in the usage of the machine?
• Please explain your choice.

Answer 1

In practice, depreciation is primarily a tool for reducing income tax. Therefore, it is probably better to use the linear method so that profits grow with an increase in sales and the owner will be able to buy another machine.