Accelerated Depreciation

What is accelerated depreciation?

Accelerated depreciation is an accounting method utilized for income tax purposes that takes into consideration greater depreciation of an asset's value during its previous years. While working out depreciation in a straight line spreads its cost uniformly throughout the span of an asset's life, accelerated depreciation considers higher expenses to be deducted in the initial not many years after the asset purchase, bringing down the expenses as the asset ages.

More profound definition

An asset sees its heaviest use toward the beginning of its life when it is still new, efficient and profoundly functional. The accelerated depreciation method matches the asset's heavy use. As the asset ages, it is utilized less vigorously and is phased on a mission to incline toward a more current asset.
Several methods are utilized to work out the accelerated depreciation of an asset, with the two principal ones being the sum of the years' digits (SYD) method and the double declining balance method. Companies that decide not to utilize accelerated depreciation utilize the straight-line method, where an asset devalues at a standard rate over its lifetime. No matter what the method utilized, all assets end up with a similar amount of depreciation, which is recognized as the initial cost of the fixed asset minus the expected salvage value. What recognizes one method from the next is the manner by which rapidly the depreciation of the fixed asset is recognized.

Illustration of accelerated depreciation

• Working out accelerated depreciation utilizing the SYD method brings about an asset seeing greater depreciation initially and less depreciation as it ages. An illustration of the SYD depreciation method is the point at which a company purchases an asset at $160,000 and anticipates that it should be helpful for a long time and later be sold for $10,000. This means that the asset's value deteriorates by $150,000 over the five years of purpose.

Calculation of the depreciation utilizing the SYD method uses the formula:

n(n+1) \u00f7 by 2, where n is the thing's helpful life in years.

• The double declining balance method of computing accelerated depreciation assumes that the thing deteriorates at two times, or 200 percent, of its straight-line rate. The declining balance is the asset's carrying value, or book value, toward the beginning of the accounting period. The book value alludes to the cost of the asset, less the accumulated depreciation. An asset's book value brings down when its contra-asset depreciation is added to the depreciation expense over the accounting period.

An illustration of the double declining balance method is the point at which a company purchases an asset on Jan. 1 for $100,000 and anticipates that it should have no salvage value toward the finish of its anticipated lifespan of 10 years. With this accounting method, the asset's book value of $100,000 is duplicated by 20 percent in its most memorable year to yield a depreciation of $20,000. This value is a debit to the Depreciated Expense and a credit to the Accumulated Depreciation of the asset.
Accelerated depreciation of assets is a concept all business owners need to comprehend. In spite of the fact that it is genuinely complex, and its subtleties are best passed on to a CPA or attorney, you want to know how to save money on taxes by exploiting it. Since the regulations in regards to depreciation change consistently, it is important to talk to a tax professional before you purchase equipment or complete tax forms for your business.

Features

• The key accelerated depreciation methods incorporate double-declining balance and sum of the years' digits (SYD).
• Accelerated depreciation is any depreciation method that takes into consideration the recognition of higher depreciation expenses during the previous years.
• Accelerated depreciation is not normal for the straight-line depreciation method, where the last option spreads the depreciation expenses uniformly over the life of the asset.
• Companies might involve accelerated depreciation for tax purposes, as these methods bring about a deferment of tax liabilities since income is lower in prior periods.