Business, Legal & Accounting Glossary
Method that records greater depreciation than straight-line depreciation in the early years and less depreciation than straight-line in the later years of an asset’s holding period.
Any method of cost recovery of a fixed asset that is faster than using the STRAIGHT-LINE DEPRECIATION method. Traditional rationale supports higher maintenance and repair costs in later years. These costs are offset in the early years by the higher depreciation expense, resulting in a level effect on earnings throughout the useful life of the asset. Sometimes accelerated depreciation is used as a tax shelter because of large up-front write-offs with no reduction of cash flow. See several methods of accelerated depreciation described: ACCELERATED COST RECOVERY SYSTEM; SUM-OF-THE-YEARS-DIGITS; DOUBLE-DECLINING BALANCE.
Accelerated depreciation is a depreciation method whereby an asset loses book value at a faster rate than the traditional straight-line method.
Generally, this method allows greater deductions in the earlier years of an asset and is used to minimise taxable income.
For example; a laptop computer may be expected to have a useful life of 4 years when it is first purchased, however, as a result of new product innovations, it is replaced after just two years.
If the useful life basis had been used, the full cost wouldn’t have been charged to the accounts until the end of the 4th year; By accelerating depreciation the full charge can be made earlier, thus reflecting the short shelflife of high-tech products.
In the US, the accelerated deprecation method may be used to gain tax advantages.
Some companies desire accelerated depreciation and a cessation to the corporate minimum tax.
Many businesses are pushing hard for enhanced accelerated depreciation allowances for plants, machinery and equipment.
Accelerated depreciation is utilised in some countries in order to encourage growth into renewable energy.
The idea of accelerating depreciation was backed by the national lobby group; The National Association of Manufacturers.
Accelerated depreciation is hardly a new concept.
Accelerated depreciation can often provide tax benefits for manufacturing businesses.
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Accelerated depreciation is a method of allocating larger portions of the cost of an asset in earlier years of the asset’s life and less in the later years of useful life. In other words, an accelerated depreciation method does exactly what the name implies. It front-loads larger amounts of depreciation in the beginning years and smaller amounts in later years. This is opposed to the straight-line method that allocates an equal amount of depreciation every year throughout the asset’s useful life.
The rationale behind an accelerated method is that assets are generally more useful when they are new. Thus, the costs should be allocated according to the actual asset usage instead of equally throughout the useful life. This makes sense since depreciation isn’t a way to “expense” an asset. It’s a method for allocating the asset’s cost of benefits.
Because accelerated depreciation necessitates additional depreciation calculations and record keeping, some businesses avoid it (though fixed asset software can readily overcome this issue). Companies may also disregard it if they are not consistently earning taxable income, removing the primary reason for using it. Companies may also disregard accelerated depreciation if they have a small number of fixed assets because the tax benefit of using accelerated depreciation is minimal. Finally, publicly traded companies are less likely to use accelerated depreciation because it reduces the amount of their reported income. When investors see a lower reported income figure, they tend to bid down the stock price of a company. This is not the case for privately held businesses, which are under no obligation to report positive net income figures to anyone. As a result, privately held companies are more likely than publicly traded companies to use accelerated depreciation.
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This glossary post was last updated: 13th April, 2022 | 0 Views.