Accelerated Depreciation
Candlefocus EditorThere are two main methods of accelerated depreciation that businesses may use. The double-declining balance (DDB) method calculates depreciation expenses by multiplying the straight-line rate by two and then applying that to the asset's book value; this amount is then deducted from the book value to arrive at the remaining book value. On the other hand, the sum of the years’ digits (SYD) method of accelerated depreciation calculates the asset's depreciation rate by multiplying the straight-line depreciation rate by a fraction composed of the remaining years of the asset's life over the total number of years of its expected use. This amount is then subtracted from the asset's book value to arrive at the remaining book value.
Accelerated depreciation is often used for tax purposes as it results in the recognition of higher depreciation expenses during the early years of the asset’s life. This is beneficial from a tax perspective as it allows businesses to recognize limited income in earlier years, thus resulting in a deferment of taxes paid. It also reduces net income in the earlier years, which can help businesses save up on taxes.
Apart from tax purposes, businesses may also use accelerated depreciation to show a higher fixed asset turnover, as accelerated depreciation is a more accelerated method of recognizing depreciation expenses and thus lowers the book value of a fixed asset more quickly.
Overall, accelerated depreciation is a method of depreciation that can prove to be a great aid to businesses in both their tax and financial performance. It is important to note, however, that the method used should boil down to a company’s individual situation.