Accelerated Depreciation

What is Accelerated Depreciation?

Depreciation is the reduction in value of a long term asset due to wear and tear. Accelerated depreciation is when the depreciation expense in the early years of the assets life is higher than the depreciation in the later years.

Most long term assets owned by a business have a limited life therefore depreciate over time. An estimate of the depreciation is charged to the income statement of a business each accounting period and represents an expense of the business.

There are a number of methods of calculating depreciation, the most simple being straight line depreciation, which writes off the cost of a long term asset evenly over its useful life.

An alternative method is the declining balance method which accelerates the depreciation so that it is higher in earlier years and declines as the asset gets older.

The benefit of using accelerated depreciation formula is that it allows a business to write off its assets quicker, and assuming the tax regime allows it, the accelerated tax depreciation will create a higher depreciation expense in the early years, reduce taxable profits, and therefore the tax expense for the business.

Using an accelerated depreciation method will make the business seem less profitable in its early years and more profitable in the later years.

For further information see the Wikipedia definition.

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Accelerated Depreciation November 19th, 2015Team

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