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, 2016Team

You May Also Like

Related pages

p&l basicsexample of marketable securitiesretained earning balancebookeeping basicsexcel calculate irrcompute accounts receivable turnovercontra revenue accountexamples of deferred revenueunder the allowance method of accounting for uncollectible accountsthe effect of transactions on the accounting equationsuspense account examplesimprest cash accountjournal entry for accrued salariesaccounting entries for salesrental ledger samplebank ledger templatepercentage of completion method exampledefine notes receivablecash receipts journal exampleexamples of accounts receivabledefine note payableaccrual journal entry examplejournal entry for accrual of expensesis unearned revenue on the balance sheetdegree of operating leverage equationjournal entry of bills receivableadjusted gearing ratiointerest earned ratio formuladouble declining depreciation calculatoraccrued interest on notes payablepresent value of ordinary annuity calculatordebtors journalhow do you calculate the contribution margindebit journal entryaccounting cycle flow chartcalculating depreciation using straight line methodnper function in exceljob costing journal entries examplescarriage inwards and outwardscalculation of gearing ratiowhat is unearned revenue classified aschart of accounts restaurantextended dupont equationjournal entry for cheque receivednoncontrollable costsgross margin vs markup calculatorprepare a correct bank reconciliationjournal entry for accrualscalculate fvperpetual inventory accountingis unearned rent a liabilityeom invoicesinking fund accounting entriesamortization schedule examplecalculate contribution marginannuity due financial calculatoraccounts receiveable turnoverhow to calculate account receivable turnovercogs percentage formulaannuity formulaaccounting practice quizbrs bank reconciliation statementwhat is a contra asset in accounting termspayroll journal entriescalculating contribution margin ratiopresent value lump sumexcel depreciation templateassignment of receivablesdiscounting cash flows in excelexample of accrual basis of accountingstraight line depreciation calculatordouble declining depreciation calculation formulatrade receivables debtorshow to amortize intangible assetscalculating ratios in excelhow do you calculate ending inventory