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Main Finance Terms accelerated depreciation

accelerated depreciation



method recognizing higher amounts of depreciation in the earlier years and lower amounts in the later years of a fixed asset's life. Some machines, for example, are more efficient early on and generate greater service potential- matching dictates higher depreciation expense in those years. Over time, depreciation expense moves in a downward direction and maintenance costs tend to become higher- thus the effect of accelerated depreciation is fairly even charges to income. Greatest tax benefits from depreciation are enjoyed in the earlier years.

See alsoAccelerated Cost Recovery System (ACRS),sum-of-the-years'-digits (SYD) method,double declining balance method
Dictionary of Finance and Investment Terms
accelerated depreciation

depreciation methods that allow faster write-offs than straight-line rates in earlier periods of the useful life of an asset. For example, in the first few years of recovery, MACRS allows a 200% depreciation methods that allow faster write-offs than straight-line rates in earlier periods of the useful life of an asset. For example, in the first few years of recovery, MACRS allows a 200%Double-Declining-Balancewrite-off, which is twice the rate ofstraight-line depreciation. Depreciable assets other than buildings fall into 3-, 5-, 7-, 10-, 15-, or 20-year recovery periods under the general depreciation system.


Dictionary of Banking Terms
accelerated depreciation

accounting method of reducing the book value of an asset at a higher rate than comparable methods in the early years of ownership. Since 1981, the most common form of accelerated depreciation is the accelerated cost recovery system (ACRS), which later was modified by thetax reform act of 1986Previous methods of accelerated depreciation included the declining balance method and the sum-of-the-years digits method.


Dictionary of Business Terms
accelerated depreciation

any one of a number of allowed methods of calculating depreciation that permit greater amounts of deductions in earlier years than are permitted under the straight-line method, which assumes equal depreciation during each year of the asset's life.

See alsoAccelerated Cost Recovery System (ACRS),Sum-of-the-Years'-Digits (SYD) Depreciation,declining-balance method
Dictionary of Insurance Terms
accelerated depreciation

method in which larger amounts of depreciation are taken in the beginning years of the life of an asset and smaller amounts in later years. The objective is to defer taxes legally, thereby allowing funds to be retained by a business to finance growth.


Dictionary of Real Estate Terms
accelerated depreciation

depreciation methods, chosen for income tax or accounting purposes, that offer greater deductions in early years.

The straight-line method, rather than accelerated depreciation, generally applies to buildings bought after 1986.

Example: One method of accelerated depreciation is the double declining balance method (DDB). If straight-line deductions equal 5% of depreciable basis, DDB allows a deduction of 10% (200% of 5%), but applied to the undepreciated basis. Thus the deductions decline each year (Figure 2).

See alsoMACRS
Related Terms:
Dictionary of Accounting Terms
Accelerated Cost Recovery System (ACRS)

system of depreciation for tax purposes mandated by the Economic Recovery Act (ERA) of 1981 and modified by the Tax Reform Act of 1986. The type of property determines its class. Instead of providing statutory tables, prescribed methods of depreciation are assigned to each class of property. For 3, 5, 7, and 10 year classes, the relevant depreciation method is the 200% declining balance method. For 15 and 20 year property, the appropriate method is the 150% declining balance method switching to the method when it will yield a larger allowance. For residential rental property (27.5 years) and nonresidential real property (31.5 years), the applicable method is the straight-line method. A taxpayer may make an irrevocable election to treat all property in one of the classes under the straight-line method. Property is statutorily placed in one of the classes. The purpose of ACRS is to encourage more capital investment by businesses. It permits a faster recovery of the asset's cost and thus provides larger tax benefits in the earlier years.


Dictionary of Accounting Terms
sum-of-the-years'-digits (SYD) method

accelerated depreciation method in which the amounts recognized in the early periods of an asset's useful life are greater than those recognized in the later periods. The SYD is found by estimating an asset's useful life in years, assigning consecutive numbers to each year, and totaling these numbers. For n years, the short-cut formula for summing these numbers is SYD = n(n + 1)/2. The yearly depreciation is then calculated by multiplying the total depreciable amount for the asset's useful life by a fraction whose numerator is the remaining useful life and whose denominator is the SYD. Thus annual depreciation equals

(Original Cost - Salvage Value)xRemaining Useful Life
SYD

For example, assume that an asset costs $1000 and has an estimated useful life of five years. The estimated salvage value at the end of the five-year period is $100. The SYD is 5(5 + 1)/2 = 15. The calculations for this example are shown below:

YearFractionDepreciation
15/-15x$900= $300
24&frasl-15x900= 240
33&frasl-15x900= 180
42&frasl-15x 900= 120
51&frasl-15x900= 60
Total$900

Dictionary of Accounting Terms
double declining balance method

accelerated depreciationmethod in which a constant percentage factor of twice the straight-line rate is multiplied each year by the declining balance of the asset's book value. The straight-line rate is simply the reciprocal of the useful life in years, multiplied by 100. If the useful life is five years, the straight-line rate is 1/5 ? 100 = 20%. Therefore, the double declining rate is 40%.

To determine the annual depreciation expense, the asset's book value at the beginning of the period is multiplied by the double declining rate.

For example, assume that the asset costs $1000 and has an estimated useful life of five years. The estimated salvage value at the end of the five-year period is $100. The calculations for this method follow:

Note that in the fifth year depreciation expense is only $30, the amount needed to reduce the asset's book value to the estimated salvage value of $100. An asset is not depreciated below its salvage value. Thus, even though salvage value was ignored in the initial computation, the depreciation in the last year(s) cannot bring the asset's book value to less than the salvage value.


Dictionary of Business Terms
Accelerated Cost Recovery System (ACRS)

system of depreciation for tax purposes mandated by the Economic Recovery Act (ERA) of 1981 and modified by the Tax Reform Act of 1986. The type of property determines its class. Instead of providing statutory tables, prescribed methods of depreciation are assigned to each class of property. For 3, 5, 7, and 10 year classes, the relevant depreciation method is the 200% declining balance method. For 15 and 20 year property, the appropriate method is the 150% declining balance method switching to the method when it will yield a larger allowance. For residential rental property (27.5 years) and nonresidential real property (31.5 years), the applicable method is the straight-line method. A taxpayer may make an irrevocable election to treat all property in one of the classes under the straight-line method. Property is statutorily placed in one of the classes. The purpose of ACRS is to encourage more capital investment by businesses. It permits a faster recovery of the asset's cost and thus provides larger tax benefits in the earlier years.


Dictionary of Business Terms
Sum-of-the-Years'-Digits (SYD) Depreciation

method of allocating the cost of an asset over its useful life. It requires a fraction to be computed each year, which is applied against the depreciable amount. The numerator is the number of years left to be depreciated. The denominator is the sum of the years' digits of the depreciable life. The formula for the denominator is

N x (N + 1)
2

where N is the depreciable life. See also accelerated depreciation. For example, an automobile used in business costs $10,000 and has a four-year depreciable life. Sum-of-the-years'-digits depreciation results in the deductions shown below:


Dictionary of Business Terms
declining-balance method

method of accelerated depreciation where a percentage rate of depreciation is applied to the undepreciated balance, not to the original cost.


Dictionary of Real Estate Terms
MACRS

Referring Terms:
Accelerated Cost Recovery System (ACRS)
declining-balance method
depreciation (tax)
sum-of-years-digits depreciation


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accelerated depreciation