What Is Accelerated Depreciation?
Accelerated depreciation is a technique in accounting for determining the worth of an item over a period. It’s centered on the idea that an asset’s value is highest at the start of its life cycle, permitting a more significant amount of depreciation over the first few years.
Any type of depreciation is a decrease in the worth of an item that is put into use for commercial reasons. The asset’s value will depreciate over time due to wear and tear, which is an expenditure to the sole proprietor for accounting reasons.
Expenditures are more in earlier periods than later ones under accelerated depreciation. So companies might use this tactic to delay tax bills since accelerated depreciation reduces income in earlier periods.
Accelerated depreciation can assist a company in reducing its taxable revenue in the early phases of its existence when income is low and asset costs are high. Using an accelerated form of depreciation also helps offset some of the expenses of business development and improvement, encouraging shareholders to reinvest.
However, because accelerated depreciation reduces net profits in the short term, public firms seek to avoid it.
Accelerated depreciation may be a more practical method of tracking an asset’s worth. Because a new asset loses value faster than a used item, accelerated depreciation of that asset is more in line with its true worth. The Methods of Accelerated Depreciation include;
Doubling-Declining Balance (DDB): In this depreciation method, the book value of assets is depreciated at a consistent rate each year which is typically double the rate depreciation used in the straight-line approach.
Sum of the Year’s Digits (SYD): In this depreciation method, the remaining usable years of the asset and the asset’s total useful life are considered.
SYD = (number of valuable years remaining/sum of useful years.) * cost of purchase
Accelerated Depreciation Example
Assume that a corporation has invested $500,000 in machinery with a 10-year useful life. The corporation can initially compute depreciation using the straight-line technique, resulting in $50,000 per year. The depreciation amount under the DDB method is $90,909 each year.« Back to Glossary Index