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Half-Year Convention For Depreciation

Half-Year Convention For Depreciation
BusinessCorporate Finance and AccountingAccounting

What is the Half-Year Convention For Depreciation?

The half-year convention for depreciation is the depreciation schedule that treats all property acquired during the year as being acquired precisely around mid-year. This means that main half of the full-year depreciation is permitted in the primary year, while the leftover balance is deducted in the last year of the depreciation schedule, or the year that the property is sold. The half-year convention for depreciation applies to both modified accelerated cost recovery systems and straight-line depreciation schedules.

Figuring out the Half-Year Convention For Depreciation

As one of numerous U.S. generally accepted accounting principles, the matching principle tries to match expenses to the period in which the connected incomes were earned. Depreciation is an accounting convention that helps match related expenses and incomes.

A thing is recorded on a company's books as a fixed asset at the hour of purchase in the event that it will carry value to the company over a number of years. Depreciation permits a company to expense a portion of the cost of an asset in every one of the years of the asset's useful life. The company will then, at that point, keep track of the book value of the asset by deducting the accumulated depreciation from the asset's historical cost.

The half-year convention for depreciation permits companies to better match incomes and expenses in the year they are incurred by devaluing just half of the commonplace annual depreciation expense in year one assuming the asset is purchased around mid-year. This applies to all forms of depreciation, including straight-line, double-declining balance, and [sum-of-the-years'- digits](/amount of-the-years-digits).

There is likewise a mid-quarter convention that can be utilized rather than the half-year convention, if no less than 40% of the cost basis of all fixed assets acquired in a year were put in service at some point during the last three months of the year.

Illustration of the Half-Year Convention

For instance, expect a company purchases a $105,000 delivery truck with a salvage value of $5,000 and an expected life of 10 years. The straight-line method of depreciation expense is calculated by splitting the difference between the cost of the truck and the salvage value by the expected life of the truck. In this model, the calculation is $105,000 minus $5,000 separated by 10 years, or $10,000 each year. Normally, the firm would expense $10,000 in years one through year 10.

In the event that the company purchases the truck in July as opposed to January, notwithstanding, it is more accurate to utilize the half-year convention to better adjust the cost of the equipment to the time span in which the truck offers some incentive. Rather than devaluing the full $10,000 in year one, the half-year convention expenses half of the calculated depreciation expense, or $5,000 in year one. In years two through 10, the company expenses $10,000, and afterward in year 11, the company expenses the last $5,000. The half-year convention broadens the number of years the asset is depreciated, yet the extension gives a more accurate matching of expenses to incomes.

Features

  • The purpose of the half-year convention is to better adjust expenses to incomes produced by the asset in a similar accounting period, per the matching principle.
  • The half-year convention for depreciation takes one half of the common annual depreciation expense in both the first and last years of an asset's helpful life.
  • The half-year convention applies to all forms of depreciation, including straight-line, double declining balance, and amount of-the-years' digits.