Accelerated Depreciation
What is Accelerated Depreciation?
Accelerated Depreciation is a method of charging higher depreciation in the early years. Accelerated depreciation reduces tax liabilities in the earlier years of that fixed assets. Another thing is that the accelerated depreciation shows the true use pattern of a fixed asset. Assets are used more in the earlier years of their useable life, so it is natural that the depreciation will be higher in the earlier years.
Accelerated Depreciation Methods
There are two methods that we are going to cover here:
- Double Declining Balance Method
- Sum of the Years’ Digits Method
All the methods will give you the same amount of depreciation on a fixed asset, which is equal to the cost of the asset - the salvage value. But the methods are used for determining how fast you want to spread that cost to the asset's useful life.
Double Declining Balance Method
The double declining balance method is an accelerated depreciation system where we take the reciprocal useful life of an asset and double it, so this rate will be applied to the book value of the asset to calculate depreciation. The formula would be:
2 × Straight-line depreciation rate × Book value at the beginning of the year
If an asset has a useful life of 5 years the Straight-line depreciation rate would be 1/5 or 20%. Double the rate and we'll get 40% for the double declining balance. Now we'll apply a 40% rate to the asset.
Sum of the Years’ Digits Method
Sum of year digits is also an accelerated method of depreciation. Here at first, we take the total of the years. let's say we have a machine with a useful life of 5 years, the sum of years would be (1+2+3+4+5) = 15.
So, in 1st year 5/15 of the asset will be depreciated. in the 2nd year, 4/15 of the asset will be depreciated and these will continue to the fifth year. In the 5th year, 1/15 of the asset will be depreciated.
Tags:
Fixed Assets
