What Is Accelerated Depreciation?

What Is Accelerated Depreciation?

Let me explain accelerated depreciation directly: it's any depreciation method you use for accounting or income tax that lets you claim bigger depreciation expenses right at the start of an asset's life.

With methods like double-declining balance (DDB), you'll see higher expenses in those first few years, tapering off as the asset gets older. This differs from straight-line depreciation, where you spread the cost evenly across the entire life of the asset.

Key Takeaways

Accelerated depreciation means recognizing more depreciation expense early on. The main methods are double-declining balance and sum of the years' digits (SYD). It's not like straight-line, which evens out the expenses over time. You might use it for taxes to defer liabilities, as it lowers income in the early periods.

Understanding Accelerated Depreciation

These methods often line up the depreciation rate with how you actually use the asset, though it's not a strict requirement. Typically, an asset gets the most use when it's new, working at peak efficiency.

That's why accelerated depreciation makes sense—it matches the asset's usage pattern. As it ages, you don't rely on it as much, phasing it out for newer ones.

Special Considerations

Choosing accelerated depreciation affects your financial reports. Expenses spike in the early periods and drop later. You can leverage this for taxes, deferring liabilities by showing lower income upfront.

On the other hand, public companies often steer clear because it cuts into short-term net income.

Types of Accelerated Depreciation Methods

Let's break down the main types you should know.

Double-Declining Balance Method

The double-declining balance (DDB) is a key accelerated method. You take the reciprocal of the asset's useful life, double it, and apply that rate to the book value each year.

For instance, if an asset lasts five years, the reciprocal is 1/5 or 20%—double it to 40%, and apply that to the current book value. The rate stays the same, but the dollar amount shrinks because it's based on a decreasing base.

Sum of the Years’ Digits (SYD)

The sum-of-the-years’-digits (SYD) method also accelerates depreciation. Add up the digits of the asset's life—for a five-year asset, that's 1+2+3+4+5=15.

In year one, depreciate 5/15 of the base; year two, 4/15, and so on, down to 1/15 in year five.

What Do Accelerated Depreciation Methods Do?

They generally align depreciation with actual use, though not always required. This happens because assets are most efficient and heavily used when new.

What Is the Rationale Behind Accelerated Depreciation Methods?

The logic is straightforward: it matches how the asset is actually used. As it gets older, it's used less, replaced by newer options.

How Does the Accelerated Depreciation Method Affect Financial Reporting?

It front-loads expenses, making them higher early and lower later. For taxes, this defers liabilities by reducing early income.

What Are the Types of Accelerated Depreciation Methods?

There are two primary ones: double-declining balance (DDB), which depreciates faster than straight-line and twice as quick as standard declining balance; and sum of the years’ digits (SYD), where you sum the years' digits and depreciate by descending fractions each year.

The Bottom Line

In summary, accelerated depreciation is a method for accounting or taxes that pushes more expenses to the early years of an asset's life. You'll get higher deductions upfront and lower ones later as the asset ages.