Final answer:
Choosing the reducing balance method over the straight-line method of depreciation will result in £700 higher profits over three years for the business, due to smaller depreciation charges in the earlier years.
Step-by-step explanation:
The question involves comparing the effects of different depreciation methods on the profits of a business. Depreciation is an accounting method used to allocate the cost of a physical asset over its useful life. In this scenario, a business is deciding between the straight-line method and the reducing balance method for depreciating a £24,000 non-current asset at 10% per annum.
With the straight-line method, the asset would depreciate by £2,400 (£24,000 * 10%) each year, leading to a uniform reduction in profits for each of the three years. In contrast, the reducing balance method depreciates the asset by 10% of its remaining value each year, leading to a smaller depreciation expense and consequently higher profits in the earlier years.
To calculate the difference in profit over three years, we must compare the cumulative depreciation charge under both methods. Over three years using the straight-line method, depreciation would total £7,200 (£2,400 per year * 3 years). With the reducing balance method, the first year's depreciation is £2,400, second year is £2,160 (£21,600 * 10%), and the third year is £1,944 (£19,440 * 10%), which totals £6,504 (£2,400 + £2,160 + £1,944). Thus, profits would be £700 greater (£7,200 - £6,504) over three years if the reducing balance method is used.