Depreciation is a commercial expense. A company must be aware of its costs in order to be profitable. Assets depreciate when their value decreases over time until it reaches zero. Office supplies, computer hardware, industrial equipment, and other items depreciate over time. Real estate is one kind of asset that does not lose value over time.

1. What isAccelerated
Depreciation?

2. Depreciation is a commercial expense.A company must be aware of
its costs in order to be profitable.Assets depreciate when their value
decreases over time until it reaches zero. Office supplies, computer
hardware, industrial equipment, and other items depreciate over
time. Real estate is one kind of asset that does not lose value over
time.

3. A depreciation method called accelerated depreciation causes an
asset’s value to decline more quickly than it would under a
conventional depreciation approach like the straight-line method.
The initial years’ experience more accelerated depreciation than the
later years.Taxes can be decreased by using accelerated
depreciation.

4. We’re sure most people know whatAccelerated depreciation is, but
accelerated depreciation is a more complicated version of it. Our
aim is to make it easily understandable.This is exactly what we also
do at a much higher level in our accounting course and tally institute
in Ahmedabad from S20 training institute. SO, be sure to check it
out!

5. What is Accelerated Depreciation?

6. Early on in their useful lifespan, fixed assets depreciate more quickly
due to accelerated depreciation.This kind of depreciation lowers
the amount of taxable revenue early in an asset’s life, deferring tax
obligations to later periods.The effect reverses later, so there will be
less depreciation available to conceal taxable income once the
majority of the depreciation has already been recorded.The end
result is that a corporation eventually has to pay more in income
taxes.As a result, the net result of accelerated depreciation is the
postponement of income taxes.The fact that accelerated
depreciation may genuinely match the usage pattern of the
underlying assets, which involves more usage early in their useful
lives, is another justification for using this concept.

7. Popular Accelerated Depreciation
Methods

8. The largely common methods of accelerated depreciation are the
double declining balance method and the sum of the years’ digits
method.

9. Popular Accelerated Depreciation
Methods

10. The largely common methods of accelerated depreciation are the
double declining balance method and the sum of the years’ digits
method.

11. Double Declining Method

12. The double-declining balance depreciation method, often known as
the double depreciation method, accounts for higher depreciation in
the early years of the machinery’s useful life than in the later years.
This may represent a situation in which the expense of equipment is
more valuable in its early years than in its later years. For instance,
an automobile loses greater value the first few years after being
purchased.The depreciation factor for the double-declining balance
technique is double that of the straight-line expense method.The
depreciation percentage, which is equal to one divided by the total
number of life span years, is first calculated in order to determine
the double-declining balance depreciation.

13. The cost of the machinery for the first year is multiplied by 2 and
then multiplied by the depreciation percentage in order to calculate
the double-declining balance depreciation for the first year.The
machinery’s depreciation is subtracted from its initial cost in this
stage to produce a new value.The machinery’s new value is then
determined using this value.The new depreciation is then calculated
by multiplying the machinery’s new value by twice the depreciation
percentage. Every year of the complete life span years is followed
by these stages.

14. Double declining balance = 2 x Straight-line depreciation rate x
Book value at the beginning of the year
SupposeABC Company purchases a machine for $100,000, with an
estimated salvage value of $10,000 and a useful life of 5 years.The
straight-line depreciation rate is 20%.
The double declining balance depreciation method calculation is:

15. Sum of the years’ digits method

16. Another accelerated depreciation method is the sum of the years’
digits method. Additionally, higher depreciation happens in the
early years and a lower amount occurs in the latter years,
comparable to the twofold falling depreciation approach.
In the sum of the year’s digits depreciation technique, the
depreciation is calculated by dividing the asset’s remaining life by
the sum of the years’ digits, which is then multiplied by the asset’s
purchase price.

17. Start by adding up all the asset’s estimated life’s digits.An asset
with a five-year life, for instance, would have a base of 1 + 2 + 3 + 4 +
5 = 15, or the sum of the digits 1 through 5.
5/15 of the depreciable base would be written off in the first year of
depreciation.Only 4/15 of the depreciable base would be
depreciated in the second year.This continues until the final 1/15 of
the base is depreciated in year five.
Applicable percentage (%) = Number of years of estimated life
remaining at the beginning of the year / SYD

18. Where:
SYD = n(n+1) / 2
SYD stands for sum of the years’ digit
n = number of years
SayABC Company purchases a machine for $100,000 with an
estimated salvage value of $10,000 and a useful life of 5 years.The
straight-line depreciation rate is 20%.

19. A Comparison of Accelerated
Depreciation Methods with the
Conventional Straight-Line Method

20. Between accelerated and straight-line depreciation, there are
significant differences. A straight-line depreciation technique, as the
name suggests, provides for a consistent amount to be depreciated
in each period, but an accelerated depreciation approach allows for
a significantly higher amount to be depreciated in the first few
years. Second, the calculation of accelerated depreciation is more
difficult than that of straight-line depreciation.And third, straight-
line depreciation depicts utilisation more accurately than
accelerated depreciation, which is less likely to reflect the real usage
pattern of the underlying assets.

21. Compare the straight-line depreciation to the accelerated methods
of depreciation using the same example of a machine worth
$100,000 with an estimated salvage value of $10,000 and a usable
life of five years.
A table showing the annual depreciation amounts for each
approach:

22. Financial Impact of Different
Methods

23. The tables above show that, depending on the technique used, the
amount of depreciation varies from year to year. According to
financial research, accelerated depreciation tends to inflate a
company’s reported results and show lower profits than would
otherwise be the case. Long-term, as long as a corporation keeps
buying and selling assets at a constant rate, this is not the case. Less
annual depreciation is incurred as the asset nears the end of its
useful life, which ultimately results in higher reported profits for the
business in those later years.

24. To minimise taxes in the initial years of an asset’s life, businesses
frequently employ quick depreciation techniques. It’s vital to
remember that regardless of the method utilised, the total tax
deductions over the asset’s lifetime would remain the same.The
timeliness of the deductions is the only advantage of using an
accelerated technique.

25. Rapid procedures offer greater tax savings early on and smaller
benefits thereafter. It is preferable to save money sooner rather
than later because business managers take theTimeValue of Money
into account. It aids in raising the company’s Net PresentValue.

26. When Not to Use Accelerated
Depreciation

27. Some businesses avoid accelerated depreciation because it
necessitates more depreciation calculations and record keeping
(though fixed asset software can readily overcome this issue). It may
also be disregarded by businesses if they are not constantly
generating taxable income, eliminating its main benefit. Because
adopting accelerated depreciation has a minor tax impact,
businesses with a modest amount of fixed assets may choose to
disregard it. Finally, accelerated depreciation is typically avoided by
publicly traded corporations because it lowers their reported
income. Investors often buy down the price of a company’s stock
when they observe a lower reported income figure.

28. So that was all you needed to know about accelerated depreciation.
If you want to have in-depth knowledge about more such concept,
check out S20s website and join our accounting course in
Ahmedabad visit www.s20.in.

29. Super 20 Training Institute
www.s20.in
+91 7069 646028
Address
205, Narayankrupa Square,
Opp. H K Commerce College,
Gandhigram Railway Crossing,
Ashram Road,
Ahmedabad – 380009