accelerated depreciation method

Depreciation is an accounting concept that is used to allocate the cost of a tangible or intangible asset over its expected useful life. The process of depreciation pumps cash from the business profit and loss statement to the balance sheet, thereby transferring the cost from the income statement to the balance sheet. Accelerated Depreciation is a more aggressive method of depreciation that allows companies to record larger depreciation expenses up front. This translates into a lower taxable income in the current year and a greater tax deduction with the opportunity for cash flow benefits.

Generally accepted accounting principles (GAAP) require that all assets be depreciated over their useful life. The most common method of depreciation is the straight-line method, where equal periodic depreciation is applied over the useful life. The accelerator method is used by companies to either reduce taxes or generate more cash by shifting future depreciation expenses to the current period.

The two main methods of Accelerated depreciations are the double declining balance method and the modified accelerated cost recovery system (MACRS). Double declining balance (DDB) is a depreciation method that takes a fixed percentage of the assets original cost as depreciation every year during the assets life. This approach allows companies to amortize more of the capital expenditure in the early years of the assets life than in the later years. This method is typically used for tax purposes, as it allows tax savings in the early life of asset.

The Modified Accelerated Cost Recovery System (MACRS), on the other hand, is an accounting method for determining the value of depreciable property for federal income tax purposes. This method lumps depreciation expenses into shorter time periods and allows businesses to deduct more in the current year. This method is based on a class-life system in which capital assets are grouped into class lives based on their characteristics. The actual amount of accelerated depreciation that can be taken each year is determined by the class life of the asset.

The primary benefit of the accelerated depreciation is its ability to generate cash flow in the current period by taking larger-than-normal depreciation deductions. This additional deductions results in tax savings over the course of an assets life, since an asset has a smaller taxable base in its earlier years. These tax savings can be used to pay other expenses, or be used in other areas of the business.

The primary disadvantage of the accelerated depreciation is that it can distort the accounting picture. Reported net income will be lower in the present period, and higher in future periods, as more of the depreciation expense is recognized in the current period. This can make it more difficult for investors and other stakeholders to accurately assess the performance of the business operations.

In conclusion, accelerated depreciation is a helpful tool for businesses to reduce their taxes and generate cash flow in the current period. Used properly, it can lead to substantial cost savings. However, it is important to note that it can also distort the companys reported net income and make it difficult to accurately assess the performance of operations. Therefore, it is important for businesses to understand the potential drawbacks before making the decision to use accelerated depreciation.

The accelerated depreciation method is a special accounting technique used to decrease the amount of depreciation expense taken over the life period of a noncurrent fixed asset. This method is different from straight line depreciation because it reduces the amount of the annual expense by an increasing percentage each year. This is usually done by deducting a larger amount in the earlier years of the assets life and a lower amount in the later years.

The accelerated depreciation method is commonly used to account for the usage of fixed assets in businesses. The depreciation is calculated based on the asset’s cost, expected useful life and expected salvage value. The principle behind the accelerated depreciation method is to match more of the cost of an asset to the period when it will benefit the company more. This can help businesses save money, with the up-front deduction and accelerated depreciation allowing the business to realize tax benefits faster.

The main advantages of the accelerated depreciation method are that it allows businesses to write off the value of a fixed asset sooner, potentially benefiting from tax savings at a faster rate. However, there are some drawbacks to this method as well. As businesses are writing off the asset on a faster basis, this may cause the book depreciation of the asset to exceed the actual value of the asset sooner than with the straight line method.

In the end, both methods of depreciation have their pros and cons and the choice of which one to use ultimately comes down to the individual business’s specific needs and goals. For companies that need to rapidly write off expenses due to large capital investments, or for companies that want to see large cash flow benefits in the near future, the accelerated depreciation method could be an effective solution.