# Accelerated Depreciation Method

Depreciation is the reduction in value of a long term (fixed) asset due to wear and tear. The depreciation expense can be calculated using a number of methods including straight line, declining balance, and units of production. Each of these methods will provide a different depreciation estimate for each year of the life of the asset.

If the calculation results in a higher depreciation expense in the early years compared to the later years, then the depreciation of the asset is said to be accelerated and the calculation is referred to as an accelerated depreciation method.

## Use of Accelerated Depreciation Method

The accelerated depreciation method is used for the following main reasons:

1. Some assets reduce in value due to wear and tear much quicker in the early years, therefore the use of an accelerated depreciation method properly reflects the actual wear and tear on an asset over its useful life.
2. The additional expense reduces income and therefore tax in the early years thereby deferring tax liabilities (assuming the tax regime allows it). The downside of this of course is that the business appears less profitable in the early years.

## Which Depreciation Method is Considered an Accelerated Method?

Not all depreciation calculation methods result in an accelerated depreciation expense. For example, the straight line method calculates a depreciation expense which is the same each year.

The following methods do produce a depreciation expense which is higher in the earlier years than in the later years, and are therefore considered to be accelerated depreciation methods.

## Accelerated Depreciation Method Example

If a business purchases an asset costing 9,000 with an estimated salvage value of 1,000 after a 4 year useful life, then the accelerated depreciation for the first 4 years using the double declining balance depreciation is calculated as follows:

```Double declining rate = 2 x 1 / Useful life
Double declining rate = 2 x 1 /4 = 50%
Accelerated depreciation year 1 = 50% x 9,000 = 4,500
Accelerated depreciation year 2 = 50% x 4,500 = 2,250
Accelerated depreciation year 3 = 50% x 2,250 = 1,125
Accelerated depreciation year 4 = 125 (to reduce to salvage value)
```

The depreciation is higher in year 1 (4,500) and declines over the following years and therefore the double declining balance method is referred to as accelerated depreciation method.

Contrast this to the calculation carried out using the straight line method.

```Straight depreciation = (Cost - Salvage value) / Useful life
Straight depreciation = (9,000 - 1,000) / 4 = 2,000
Straight depreciation year 1 = 2,000
Straight depreciation year 2 = 2,000
Straight depreciation year 3 = 2,000
Straight depreciation year 4 = 2,000
```

Each year the depreciation expense is the same, the depreciation expense is not accelerated, and the straight line method is not an accelerated depreciation method.

Notice that in both cases over the 4 years, the total depreciation is 8,000 which reduces the asset to its salvage value of 1,000. The accelerated depreciation method simple accelerates the depreciation towards the earlier years, it does not change the total depreciation charge.

## When is Accelerated Depreciation Method Used?

The accelerated depreciation method is often used when as asset is likely to generate more income in its early years, so that the expenses of using the asset are matched to the income generated by it. In addition, it is also used when the asset is likely to be disposed of before the end of its useful life, such as motor vehicles or computers.

Accelerated Depreciation Method November 6th, 2016

## Related pages

income gearing ratiodaily sales outstanding formulaformula for annuity paymentperiod cost formulasimple pay back periodaccounting outstanding checksfuture value of a lump sum formulablank accounting balance sheetretained earning debit or creditwhat does debtors mean on a balance sheetbad debts entry in balance sheetprintable accounting ledgerlease calculator formulahow to record depreciation expense in journal entryfactoring of trade receivableswhat is the meaning of bills payable and bills receivablesexplain petty cashannuities due calculatorpetty cash countamortization schedule examplenet present value and profitability indexanuity formulabank ledger templatefob value of goodswhat is horizontal and vertical analysisaccount receivable journal entrycalculator present value of annuityin a bank reconciliation a nsf check ispaid dividends to stockholders journal entryconstant annuitystockholders equity balance sheet examplewhy is trial balance preparedaccounting debit credit cheat sheetcalculate margin exceldiscuss the accounting cycleperpetual system journal entriesgp formula calculationmulti step income statement practicenine steps of the accounting cycleprofitability ratios definitionbank reconciliation statement sampledeferred tax liability formularoce ratio definitionzero based budgeting definitiondepreciation half year conventionhow to use the fifo methoduneven cash flowaccount receivable turnover calculatorperiodic vs perpetualexample of bookkeeping recordscalculate asset turnover ratiopresent value of lump sum formulaacquisition accounting journal entriesperiodic interest rate formulainventory template sheetfuture value of perpetuity formulaprepaid insurance accountinghow to compute inventory turnovercalculate profitability indexallowance method for accounting for bad debtswhat is expanded accounting equationretained earning statementaccounts receivable reconciliation templateformula for growing annuityexamples of contra assetsallowance for doubtful accounts ratiostandard costing method exampleonline tvm calculatortimes interest coverage ratioamortisation in accountingwhat is scrap value in depreciationgrn accounting definitionowner's drawingsaccounts receivable reconciliation templateexamples of indirect laborincome statement from trial balance